President Susilo Bambang Yudhoyono said it was in response to Australia's failure to satisfactorily explain its surveillance activity in Indonesia, The Jakarta Post reported.
Indonesia's move is a blow to Australia's recent hard-fought and won case for joint military action to prevent people smugglers from preying on thousands of asylum seekers looking for passage from or through the archipelago en route to Australia.
This week Indonesia recalled its envoy and said it is reviewing its agreements with Australia after leaked material indicated Australia tried to spy on the Indonesian president, including wiretapping of the cell phones of Yudhoyono and members of his inner circle.
Documents obtained by the Australian Broadcasting Corp. and The Guardian-Australia indicate Australian intelligence had attempted to listen to the president's phone conversations at least once.
Also targeted were the phone conversations of his wife, Ani Yudhoyono, and other senior Indonesian government members, ABC reported Monday.
Intelligence officials also tracked activity on Yudhoyono's cell phone for 15 days in August 2009, documents indicated.
"Why spy on your friend and not your enemy," Yudhoyono said after announcing the suspension of military cooperation.
In addition to halting cooperation on people smuggling, the Indonesian government is putting a stop to joint military exercises and the sharing of all intelligence information, the Post reported.
Yudhoyono also said both countries should agree to a code of conduct that would prevent such an incident as the wiretapping from happening again.
Indonesia reacted strongly this week when news of Australia's spying was reported by ABC.
Indonesia recalled its ambassador from Canberra and said it would review the status of Australia's diplomatic personnel.
"This is an unfriendly, unbecoming act between strategic partners," Indonesian Foreign Minister Marty Natalegawa said.
"It's impossible for an ambassador in foreign country to do their duty in the midst of an unfortunate situation like this," he said. "The summoning of the ambassador isn't considered a light step, but it's a minimum step we can do to consolidate situation."
Natalegawa also reacted strongly to Australian Prime Minister Tony Abbott's statement to Parliament that all governments gather intelligence on each other.
"I've got news for you," Natalegawa said. "We don't do it."
Yudhoyono reportedly Tweeted his displeasure at Abbott's remarks.
"I also regret the statement of the Australian prime minister that belittled this tapping matter without any remorse," the president said on his Twitter account @SBYudhoyono, the Post reported.
Canberra has been working hard to agree joint anti-people smuggling activities with its Southeast Asian neighbors.
Australian detention centers are overflowing with thousands of asylum seekers arriving by boat in Australian waters, often with tragic consequences.
In September an asylum boat sinking off Indonesia's south Java coast in September left many as 50 people, including 30 children, dead or missing.
But Canberra's attitude toward asylum issues also has been an irritant for Australia's neighbors.
The Post reported that the last time Jakarta recalled its ambassador to Australia was in 2006 in protest over Australia granting temporary visas to 42 asylum seekers from Papua where the government is battling independence movements and rebels.
Indonesia's provinces of West Papua and Papua together are about the size of Spain and occupy the western half of the island of Papua. Papua New Guinea occupies the eastern half.
The provinces have a history of low-key but often brutal violence by rebels involved in Free Papua independence movements. Rebel groups claim rural poor are being exploited by big international forestry and mining corporations.
Three police officers were killed in November last year when up to 50 armed gunmen attacked the Pirime Police Station near Wamena, an isolated Papuan highland town with a population of around 10,000.
Abbott, during his visit to Indonesia in September -- his first official trip since taking office and only days after the tragic asylum drownings -- managed an agreement in principle for closer asylum seeker and people smuggler cooperation.
Yudhoyono announced greater bilateral cooperation with Australia to tackle people smuggling, reversing a policy based on regional multinational talks.
In return, Abbott said Australia would keep a careful watch on protesters in Australia agitating for independence of the Indonesia's Papuan territories.
Australia maintains "total respect for Indonesia's sovereignty, a total respect for Indonesia's territorial integrity," Abbott said.
"The government of Australia takes a very dim view ... of anyone seeking to use our country as a platform for grandstanding against Indonesia. We will do everything that we possibly can to discourage this and prevent this," he said.