Australia demanded an apology after a senior Chinese official posted a fake image of an Australian soldier holding a knife with blood on it to the throat of an Afghan child, calling it "truly repugnant" and demanding it be taken down.
Prime Minister Scott Morrison called a media briefing to condemn the posting of the image, marking another downturn in deteriorating relations between the two countries.
The Australian government has asked Twitter to remove the image, posted on Monday by China's foreign ministry spokesman Zhao Lijian on his official Twitter account, Morrison said.
"It is utterly outrageous and cannot be justified on any basis," Morrison said. "The Chinese government should be utterly ashamed of this post. It diminishes them in the world's eyes."
Australia has told 13 special forces soldiers they face dismissal in relation to an independent report on alleged unlawful killings in Afghanistan, the head of the country’s army said on Friday.
"It is the Australian government who should feel ashamed for their soldiers killing innocent Afghan civilians," said Hua Chunying, China's foreign ministry spokeswoman, when asked about Morrison's comments.
The image posted by her colleague shows people's "indignation," said Hua, speaking at a regular news conference in Beijing on Monday. Whether it will be taken down is a matter between Twitter and the Australian government, she said.
Australia's relationship with China has deteriorated since Canberra called for an international inquiry into the origins of the coronavirus pandemic.
Earlier this month, China outlined a list of grievances about Australia's foreign investment, national security and human rights policy, saying Canberra needed to correct its actions to restore the bilateral relationship with its largest trading partner.
Morrison said countries around the world were watching how Beijing responded to tensions in Australia's relationship with China.
In the latest in a series of trade sanctions, China announced on Friday it will impose temporary anti-dumping tariffs of up to 212.1% on wine imported from Australia, a move Canberra has labelled unjustified and linked to diplomatic grievances.
Zhao wrote on Twitter: "Shocked by murder of Afghan civilians & prisoners by Australian soldiers. We strongly condemn such acts, & call for holding them accountable."
His Twitter account had posted the same message, but without the fake image of the soldier and child, on Friday.
Morrison said Australia had established a "transparent and honest" process for investigating the allegations against the accused soldiers and this "is what a free, democratic, liberal country does".
Australia had "patiently sought" to address tensions in the relationship with China and wanted direct discussion between ministers, he said.