Malcolm Turnbull is calling on China to take the "strongest action" against North Korea as the risk of military conflict intensifies.
The prime minister branded the rogue state's launch of an intercontinental ballistic missile another act of "reckless provocation".
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The missile - which could reach Darwin or Cairns - was fired on US Independence Day and while the Chinese and Russian presidents met in Moscow before a global economic summit.
"This is yet another very dangerous move by North Korea," Mr Turnbull told ABC radio on Wednesday.
"It poses a very real threat to peace in our region."
There was now a greater risk of military conflict as a result of the test, he said, and the onus was on China.
Only they had the ability to bring North Korea to its senses.
"The prospect of a conflict on the Korean peninsula is unthinkable but equally, you have to consider it ... and recognise that only the strongest action from China can stop this dangerous escalation by North Korea, absent military action," Mr Turnbull said.
US President Donald Trump on Tuesday suggested China "put a heavy move" on North Korea to end the nonsense "once and for all".
Mr Turnbull said he believed that meant imposing the very harshest economic sanctions - cutting off power or gas, for example.
"China is in a position to do all of those things."
He said he would raise the matter with world leaders at this week's G20 meetings and urge G20 leaders to take further strong action against North Korea.
Australia has agreed to expanded sanctions targeting North Korea's extractive industries and its shipping network.
Foreign Minister Julie Bishop believes all options must be on the table to deal with North Korea.
She wants China - North Korea's closest ally and economic lifeline - to act before the United Nations Security Council meets again to discuss the issue.
"The concern is now that North Korea will master the technology to mount a nuclear warhead on such a weapon," Ms Bishop told Sky News from Grenada in the Caribbean.
The US government has said all options are on the table to deal with North Korea.
Ms Bishop said that includes military options.
"Of course, there would have to be a risk assessment of that," she said.
"It would mean assured destruction of North Korea if it were to be so provocative and foolhardy as to seek to dump a nuclear payload on the United States."
Labor's foreign affairs spokeswoman Penny Wong says the global community must respond appropriately to the escalation.
Former Prime Minister Kevin Rudd fears the world is entering a dangerous new phase in dealing with North Korea following this test.
He believes the US may have already determined China is unwilling or incapable of flexing its economic muscle over North Korea to pull the rogue state into line, fearing the stand-off could trigger a trade war.
"It all heads in a very bad, spiralling direction," he said.
"The implications for Australia - and for Prime Minister Turnbull as he heads to Germany for the G20 Summit - is to argue passionately in favour of keeping the open arteries of trade functioning around the world in these difficult and challenging times."
