Australia said China should apologize for posting a fake picture on a government Twitter account that depicted an Australian soldier murdering an Afghan child.
Prime Minister Scott Morrison said Beijing should be “utterly ashamed” for sharing the “repugnant” image.
It comes amid escalating political tensions between the two countries.
The image referred to alleged war crimes by some Australian soldiers.
Earlier this month, a report found that 25 Australian soldiers were allegedly involved in the murders of 39 Afghan civilians and prisoners between 2009 and 2013.
The findings from the Australian Defence Force (ADF) inquiry sparked widespread condemnation, and are now being investigated by police.
On Monday, China’s Foreign Ministry spokesman Lijian Zhao posted a doctored image which portrayed an Australian soldier with a bloody knife next to a child. The child is seen holding a lamb.
The Australian Broadcasting Corporation reported the image appeared to be a reference to unsubstantiated rumours that elite Australian soldiers used knives to murder two Afghan teenagers. The inquiry found no evidence to support the rumours.
However it did find “credible evidence” of unlawful killings and a “warrior culture” within elite units. The allegations included that junior soldiers were encouraged to shoot prisoners for their first kill.
Mr Zhao’s tweet said: “Shocked by murder of Afghan civilians & prisoners by Australian soldiers. We strongly condemn such acts, and call for holding them accountable.”
Australia has requested Twitter remove the post from its platform, describing it as “disinformation”.
Mr Morrison described the post as “truly repugnant, deeply offensive, utterly outrageous”.
“The Chinese government should be totally ashamed of this post. It diminishes them in the world’s eyes,” he said.
“It is a false image and terrible slur on our defence forces.”
Mr Morrison went on to acknowledge that there are “undoubtedly” tensions between the two nations, but said: “This is not how you deal with it.”
Bilateral relations have rapidly deteriorated this year after Australia led calls for an investigation into the origins of the coronavirus pandemic, and ongoing discussion about Beijing’s alleged interference in Australian affairs.
In recent months, China has imposed a series of economic blows – including trade stoppages and tariffs – on about a dozen Australian imports including wine, barley and beef.
Australia has described China’s actions as “economic coercion”.
Earlier this month, China’s embassy in Australia circulated a list to local media outlining 14 policy areas where they said Australia had acted in a way that aggravated relations.
These included Australia’s decision to block Chinese investment projects, ban Chinese tech firm Huawei from its 5G tender, and “incessant wanton interference in China’s Xinjiang, Hong Kong and Taiwan affairs”.
Australia has said it will not change its policy positions.
On Monday, Mr Morrison confirmed that Australia’s requests for meetings with senior Chinese ministers continued to be rebuffed.