The Australian Government may be forced to withdraw its police force from Papua New Guinea, after a local court found their presence to be unconstitutional.
The Supreme Court ruled that certain aspects of the deployment, particularly the visitors' immunity from prosecution, violated local laws.
The 150-strong Australian force arrived in Papua New Guinea last September to help the nation's own embattled police.
Friday's move is a blow to Canberra's policy of involvement in the Pacific.
Australian troops or police have been sent to many other Pacific island states as well as Papua New Guinea - including the Solomon Islands, Fiji, Tonga and Samoa.
Australia adopted its policy of intervention in the aftermath of the 11 September attacks in the US, because it feared that instability in the region could lead to the creation of havens for drug traffickers and terrorist groups.
Return to Australia
In a unanimous verdict, five Supreme Court judges in Papua New Guinea's capital Port Moresby ruled that the current deployment of Australian police was in breach of the constitution.
Government officials from both nations said they would attempt to solve the issue, but in the meantime the police have been pulled off duty and may be sent home.
"We might find it's better to bring them back, and send them back [to Papua New Guinea] again when the legal problems have been fixed," said Australian Foreign Minister Alexander Downer.
The police are part of an Australian aid programme to Papua New Guinea, costing about A$1bn (US$770m).
But not everyone has welcomed their presence. About 300 local police officers held a protest last week calling for the Australian deployment to leave, saying there were no notable improvements in law and order.
A nation of some five million people, Papua New Guinea is rich in natural resources, but has been suffering economically due to high levels of mismanagement, crime and corruption.
Port Moresby is thought to be one of the most dangerous cities in the world.
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