Facebook Inc on Tuesday said it would stop Australians sharing news content on its platforms if a proposal to make it pay local media outlets for their content becomes law, further escalating tension with the Australian government.

Under Australia's closely watched internet reforms, the country will become the first to make the social media behemoth and Alphabet Inc's Google pay for news sourced from local providers under a royalty-style system. Facebook's plan to block the sharing of news on Australian user accounts, rather than pay royalties, puts the firm broadly in step with Google on the matter and pushes the prospect of an agreement with the government further out of reach.

"Assuming this draft code becomes law, we will reluctantly stop allowing publishers and people in Australia from sharing local and international news on Facebook and Instagram," Facebook Australia Managing Director Will Easton said in a blog post, referring to two Facebook-owned platforms.

"This is not our first choice - it is our last. It is the only way to protect against an outcome that defies logic and will hurt, not help, the long-term vibrancy of Australia's news and media sector".

Australian Treasurer Josh Frydenberg hit back, saying the proposed law was in the national interest, followed 18 months of public inquiry and would create a more sustainable local media industry where original content was paid for. "We don't respond to coercion or heavy handed threats wherever they come from," Frydenberg said in an email to Reuters' request for comment.

Bridget Fair, chief executive of Free TV Australia, a lobby group for free-to-air broadcasters, said Facebook's plan amounted to "bullying" and that the US firm would "say and do anything to avoid making a fair payment for news content".

"Australian Facebook users are being held to ransom as a tactic to intimidate the Australian government into backing down on this issue," she said in a statement.

The proposed law was "the only reasonable way to even up the bargaining power between Facebook, Google and Australian News Media Businesses," Fair said.

Facebook's Easton in his blog post called the proposed law "unprecedented in its reach", and said the company could either remove news entirely or agree to pay publishers for as much content as they wanted at a price with no clear limits. "Unfortunately, no business can operate that way," he wrote.

Like in most countries, Australia's traditional media companies in recent years have seen their mainstay advertising income streams eroded by online competitors, and consumers shy away from paid subscription.

The Australian Competition and Consumer Commission, which drafted the proposed law, was not immediately available for comment on Tuesday. It has argued the law would allow news businesses to negotiate fair payment for journalists' work.

Last month, Google began an advertising campaign using pop-up ads on its main search page that said its free service would be "at risk" and users' personal data could be shared if the firm is made to pay news organisations for their content. The ACCC called the statements "misinformation".