Australian Prime Minister Tony Abbott has bowed down to pressure and admitted on Saturday to have written a letter to Indonesian President Susilo Bambang Yudhoyono in a bid to settle the diplomatic row between the two countries.

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Reports that Canberra eavesdropped on the mobile phone of Mr Yudhoyono, the first lady and other senior officials led Indonesia to downgrade diplomatic ties with Australia, stop people smuggling cooperation and military cooperation and called on Mr Abbott for a public apology.

However, the PM did not disclose if he apologised to the president or not, but simply said the letter is being delivered to Jakarta. He also admitted damage has been done to the relationship between the two countries.

"I just want to stress that as far as I am concerned one of the fundamental tasks of any Australian government, but certainly one of the fundamental tasks of my government, is to ensure that our relationship with Indonesia goes from strength to strength," The Sydney Morning Herald quote Mr Abbott.

Indonesians, to protest the espionage, burned Australian flags in Jakarta last week, while an Indonesian newspaper, the Rakyat Merdeka, published a cartoon of Mr Abbott, depicting him as a Peeping Tom on the daily's front page.

The phone wiretapping actually happened during the term of former Australian Prime Minister Kevin Rudd, but it is Mr Abbott who is facing the wrath of the Indonesians because of his insistence on not apologising.

Mr Yudhoyono also issued a new law on Friday that created a new body called the Central Intelligence agency in response to the spying reports. The agency will draw together Indonesia's police, military, attorney-general's department and all other public sector departments to meet regularly under the authority of the State Intelligence Agency to coordinate their resources.

The top priority of the chairman of the new agency, Lieutenant-General Marciano Norman, is foreign spies operating in Indonesia.

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