Australia is at risk of a trade boycott by Arab nations in protest at Canberra's "shameful" declaration last week that it will no longer refer to East Jerusalem as "occupied".

A delegation of almost 20 ambassadors and diplomats - including representatives from Indonesia, Egypt, Saudi Arabia and Pakistan - lodged a formal complaint with the Department of Foreign Affairs and Trade in Canberra last week, local media reported.

One of the envoys, Jordanian ambassador Rima Alaadeen, said activists were urging people to boycott Australian goods during Ramadan later this month.

In the West Bank, Tom Wilson, Australia's diplomatic representative to the Palestinian Authority, was summoned for a diplomatic dressing-down while the Arab League and the Organisation of Islamic Conference said they will hold a joint emergency meeting on the issue.

Foreign Minister Julie Bishop is expected to meet a delegation of Arab ambassadors to calm the crisis, which was triggered last week when Australia's top lawmaker told a Senate committee that the term "occupied" was neither "appropriate nor useful".

The term 'occupied' when referring to Jerusalem is not appropriate

"The description of East Jerusalem as 'occupied' is a term freighted with pejorative implications," Attorney-General George Brandis said. "It should not and will not be the practice of the Australian government to describe areas of negotiation in such judgmental language."

But local media revealed this week that the comments had caught the government off guard.

Prime Minister Tony Abbott, who was visiting America at the time, said it was a "terminological clarification" and did not constitute a policy shift.

"There has been no change of policy, absolutely no change in policy. There's been a terminological clarification," he said.

"This is an area where people are, inevitably, extremely sensitive."

But Palestinian Authority spokesman Xavier Abu Eid was fuming. "With its shameful statements against international law, the Australian government has become part of the problem, rather than part of the solution."

Izzat Abdulhadi, the head of the General Delegation of Palestine to Australia, said a boycott was a possibility. "I'm afraid this will really cast a lot of shadows, negative shadows, over relations between Australia and the Arab world, and there will be a sort of negative consequences," he told the Australian Broadcasting Corporation.

Australia's live sheep trade and agricultural products to the Arab world is worth in excess of $2 billion a year.