The UN observers died near the town of Khiam
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Australia is to withdraw a contingent of 12 troops from south Lebanon, due to the deaths of four UN observers.
The soldiers will move to Beirut because the conflict zone is too dangerous, Defence Minister Brendan Nelson told reporters.
Foreign Minister Alexander Downer said there was no point in sending soldiers on a "suicide mission".
The four UN observers - from Austria, Canada, China and Finland - were killed by an Israeli air strike on Wednesday.
There has been international condemnation over the deaths of the observers, but despite hours of talks the UN Security Council has yet to agree on the wording of a statement about the attack.
'Chaotic'
Defence Minister Brendan Nelson told Australian radio on Thursday that Lebanon remained a dangerous place, and that there was "quite a degree of risk".
"Southern Lebanon in particular is a chaotic environment; it is a war zone," he added.
Australian Foreign Minister Alexander Downer was even more direct. "There's no point in sending an international peacekeeping force on a suicide mission," he said during the Asean conference in Malaysia.
He added that a peace deal should be agreed before the deployment of international forces.
It is "only in the environment of a peace settlement that you can send peacekeepers, otherwise you are going to send them into the path of destruction," he said.
Mr Downer said that a ceasefire could only happen when Hezbollah stopped firing missiles into Israel, and the Lebanese government took control of the south of the country.
Australia, like the US, has backed Israel's right to defend itself against Hezbollah fighters.
"It is very important that Australians appreciate no matter how affronted we are by what Israel is doing, they are dealing with Hezbollah and Hamas who are committed to the abolition of Israel as a state," Mr Nelson told reporters.