Defence Minister Robert Hill said up to A$450 million ($319 million) would be spent fitting out F/A-18 Hornet fighters and AP-3C Orion maritime patrol aircraft with air-to-surface missiles capable of hitting targets up to 400 km (250 miles) away.
The Hornets, which have a combat flight radius of 740 km (460 miles) and can be refuelled in flight, are also being equipped with Advanced Short Range Air-to-Air Missiles. The Hornets' new long-range missiles will be installed between 2007 and 2009.
"Combined with the new air-to-air missiles and upgraded precision-guided bombs, Australia's fighter jets will have the region's most lethal capacity for air combat and strike operations," Hill said in a statement on Thursday.
Indonesia, Australia's most strategically important regional ally which sits on its northern doorstep, expressed concern on Thursday about the long-range missile purchases.
"We'll be looking at this very carefully and (would) like to (be) enlightened against whom such an offensive capability (would) be directed," an Indonesian Foreign Ministry spokesman said in Jakarta.
Jakarta said it had understood Australia signing up to the United States' controversial "Son of Star Wars" missile shield programme as it was a defensive capability, not an offensive one. "We had questions, what will be the main impact of such a shield in terms of its potential destabilising impact on the regional security," said the spokesman.
"If there is now an idea of certain governments or certain countries in the region acquiring long-range missiles, that will elevate the issue one step further, because we are talking here about an offensive capability, no longer a defensive capability."
Australian Prime Minister John Howard tried to hose down regional concerns. "We have no hostile designs on any of our neighbours and they won't be concerned about this because we don't have any hostile designs on them," Howard told reporters. Australia's Southeast Asian neighbours are already wary about the country's close alliance with the United States, with some nations viewing Canberra as Washington's "deputy sheriff".
The United States is Australia's most important military partner and the 53-year-old alliance has tightened since the September 11, 2001, attacks on US cities and the Bali bombings in October 2002 that killed 202 people, including 88 Australians.
Last month Australia pledged to work with the United States on its ballistic missile shield plan and to establish joint defence training centres in northern Australia.
Australia is also part of the US-led F-35 Joint Strike Fighter project to develop a new-generation combat jet, which is likely to replace the F-111s. The development phase of the F-35 is not due to be completed until 2013. Defence analysts said Australia's upgrading of its Hornets was aimed at filling a gap between retiring the ageing F-111 fighters from 2010 and bringing a replacement on line and should not be seen as a new offensive capability.