Hundreds of people have gathered at the Australian embassy in Jakarta to protest against Australia's decision to grant visas to a group of Papuans.
Indonesia recalled its ambassador to Canberra last week due to the decision.
Australian Foreign Minister Alexander Downer tried to defuse the situation on Monday, saying Australia recognised Indonesia's sovereignty over Papua.
Papua was integrated into Indonesia in 1969, but a small separatist group has battled for independence ever since.
Indonesian authorities are frequently accused of human rights abuses in the province.
The row began after Canberra granted temporary visas to 42 Papuans - some of whom are reported to be leading pro-independence activists.
The Papuans arrived in Australia by boat in January, saying they were fleeing abuses by Indonesia's military.
They have been granted temporary protection visas - three-year renewable permits which allow immigrants to work.
The news has angered Indonesians who see the decision as Australian interference in Indonesian national affairs.
About 200 people held banners and chanted slogans outside the Australian embassy in central Jakarta on Monday.
"Papua is part of Indonesia," rally organiser Tri Yulianto told the Associated Press.
"By giving visas to these Papuans, it means Australia supports the separatists," he said.
But Mr Downer told parliament that the decision to grant the visas was made in accordance with international and Australian law.
He added that the government valued the co-operation it had with Indonesia.
"We will do what we can to ensure that that close friendship continues," he said.