Arab and Islamic nations have warned of trade sanctions on Australia for its decision last week to desist from referring to east Jerusalem as "occupied," the Palestinian envoy to Canberra told AFP on Friday.

Izzat Abdulhadi criticized Australia's decision and called its new position on east Jerusalem a "substantial policiy shift."

"We think that it's very provocative and un-useful, and it's not appropriate," AFP quoted him as saying.

Diplomats from countries including Indonesia, Egypt and Saudi Arabia protested on Thursday to Australia's Foreign Ministry over its announced policy change.

According to Abdulhadi, trade boycotts against Australia could be implemented if the government in Canberra upholds what he called its "isolated" stance, which the Palestinians and Jordan have already protested,  summoning Australian diplomatic representatives over the issue.

Last Thursday, Australia's attorney-general told the Senate of the policy chance on the country's policy change regarding the status of east Jerusalem.

“The description of east Jerusalem as ‘Occupied East Jerusalem’ is a term freighted with pejorative implications, which is neither appropriate nor useful,” George Brandis said, reading out a statement written following a conversation with Australia’s foreign minister, Julie Bishop.

“It should not and will not be the practice of the Australian government to describe areas of negotiations in such judgmental language,” he said.

Foreign Minister Avigdor Liberman praised the Australian move, saing he hoped other countries would have the integrity and show the courage to follow Australia’s lead.

Herb Keinon contributed to this report.

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