Victorian Liberal leader Matthew Guy backs US President Donald Trump in declaring Jerusalem the capital of Israel, in a move at odds with Foreign Minister Julie Bishop's stance.
Mr Trump has promised to move the US embassy from Tel Aviv to Jerusalem, despite a furious reaction from Palestinian and other Arab and Islamic groups.
As Premier Daniel Andrews opened the state's trade and investment office in Tel Aviv this week, Coalition MPs said it should have been located in Jerusalem.
But Australia's official policy, re-iterated by Ms Bishop on Thursday, is to wait for the status of Jerusalem to be resolved through two-state solution negotiations between Israelis and Palestinians.
Speaking on ABC radio on Thursday morning, Ms Bishop said: "We believe that the political identification of Jerusalem is a matter for final status negotiations. That's always been our position."
Asked whether the Australian government planned to extend its diplomatic presence to Jerusalem, Ms Bishop said that was not necessary.
"Australia has been a staunch supporter of Israel. But we placed our embassy in Tel Aviv and we have no plans to move it."
Earlier in the week Mr Guy said it was respectful to recognise Jerusalem as Israel's capital.
And a new war of words erupted on Thursday when the Coalition released a statement accusing the Andrews government of disrespecting the Jewish community by choosing to locate their trade office in Tel Aviv.
"It is clear that both the Jewish community of Victoria and the state of Israel support the Liberal Nationals' decision to base a Victorian government business office in Jerusalem," the statement said.
The statement quoted Zionist Federation of Australia president Danny Lamm praising the support for an office in Jerusalem.
But Dr Lamm's comments were made last week before the Andrews government announced it would open an office in Tel Aviv.
Late on Thursday afternoon, the federation released a statement clarifying its position - welcoming both the opposition and the government's commitments to open offices in Israel.
The federation said Labor's office was "perfectly located in the technological, innovation and business hub of Tel Aviv".
"The opening of the Victorian government trade and investment office in Tel Aviv and the promise to open a business office in Jerusalem represent wonderful opportunities for Australians," the statement said.
Acting Premier James Merlino rejected the opposition's claims that the government's office should have been located in Jerusalem.
"We want to make connections with the extraordinary work that is happening in Israel particularly in high tech. To do so we've got to do it via Tel Aviv," he said.
"That's what an informed government would do. Frankly, Matthew Guy's comments are irrelevant."