In a strongly worded speech Steven Smith rebuked Israel for faking four Australian passports used in the assassination of senior Palestinian Hamas official Mahmud al-Mabhuh in a Dubai hotel room in January.
Australian Federal Police along with the Australian Security Intelligence Organization and its externally oriented counterpart the Australian Secret Intelligence Service investigated the forgeries.
Other faked passports used in the elaborately planned killing were from France, Germany, Ireland and Britain.
"The high quality of these counterfeited passports points to the involvement of a state intelligence service," Smith said.
"Investigations and advice have left the government in no doubt Israel was responsible for the abuse and counterfeiting of these passports.
"This is not what we expect from a nation with whom we have had such a close, friendly and supportive relationship."
Smith said the passport holders were innocent victims.
The decision to expel the unnamed Israeli diplomat was taken by the Australian government under "national security interests" and the person has a week to leave the country.
No government can tolerate the abuse of its passports, "especially by a foreign government," Smith said. "This represents a clear affront to the security of our passport system."
The affair was said to be inconsistent with the "friendship and support" provided by successive Australian governments to Israel.
"Australia's relationship with Israel has always been founded on a basis of mutual respect and trust but Israel's actions in this respect have undermined that," he said.
Smith didn't name the Israeli official but The Australian newspaper claimed he was a Mossad agent.
In March the U.K. government expelled the Mossad station chief in London following the fraudulent use of British passports after investigations by the Serious Organized Crime Agency.
The British foreign secretary at the time, David Miliband, said there were "compelling reasons" to believe Israel was responsible for the forgeries and the affair was "intolerable."
In response to Miliband's expulsion order, Israel's ambassador to London, Ron Prosor, said he was "disappointed" but there would be no expulsion of British diplomats from Israel.
Forged British passports were used also in 1987 when eight documents reckoned to be for Mossad agents were found in a bag in a telephone booth in West Germany.
The Dubai assassination and subsequent Dubai police investigation gained worldwide attention when the authorities released CCTV footage of the killers dressed in ordinary clothes casually walking the halls of the hotel.
The footage has since been used to identify 27 alleged members of the team that tracked and killed Mabhuh.