Canberra believes a state Labor government leaked an ASIO memo warning chaos would follow a decision to move the embassy to Jerusalem, Fairfax Media reports.
The Australian Federal Police is investigating the leaking of a secret ASIO briefing that warned that any move to recognise Jerusalem as the capital of Israel could provoke unrest and violence in Palestinian territories.
Fairfax Media reports the federal government believes a state Labor government leaked the briefing note from Australia's spy agency to The Guardian.
Scott Morrison on Thursday told parliament Australia's spy agency "as a matter of routine practice provides this advice to Commonwealth and state governments on security matters".
An ASIO spokesperson told Fairfax the agency's head Duncan Lewis had spoken to AFP boss Andrew Colvin and "formally referred this matter to the AFP for investigation".
The Victorian government has denied it was behind the leak with a spokesperson saying Melbourne "had nothing to do with this information being put in the public domain.
"For the Morrison government to point fingers at the states shows how desperate and erratic they are," he told Fairfax.
It followed the leak of a series of WhatsApp messages from Indonesian Foreign Minister Retno Marsudi to her Australian counterpart Marise Payne on the proposed embassy move.