Indonesia says Australia has done “almost irreparable damage” to the countries’ relationship with its spying activities.

Indonesia has halted all co-operation with Australia on people smuggling after the phone-tapping controversy in a major blow to Prime Minister Tony Abbott’s plan to stop the boats.

Jakarta will also suspend all military co-operation, with Foreign Minister Marty Natalegawa warning of a downgrade in bilateral ties.

“We are turning off the tap by degrees,” he said.

Dr Natalegawa said on Wednesday the Australian intelligence community had “run amok”.

“Australia must take concrete steps and send strong signals of its wish to repair the almost irreparable damage that they are causing,” he said.

The nation could also look elsewhere for trading partners, said Trade Minister Gita Wirjawan, appearing to single out agriculture and the cattle trade as at risk.

Indonesian President Susilo Bambang Yudhoyono says he will send a letter to Mr Abbott’s government demanding an official apology and a full explanation as to why Australian spies targeted his mobile phone in 2009, as well as his wife’s and some of his closest confidants.

Dr Yudhoyono said he wanted a personal explanation, insisting comments directed at “Australia’s domestic community” would not suffice.

“If Australia wants to maintain a good relationship with Indonesia in the future, there must be an official explanation,” Dr Yudhoyono told reporters in Jakarta.

“It’s difficult for me to understand why this was conducted.

“Now is not the era of the Cold War.”

The president also said he could not understand why Australia had chosen to spy on a “friend and not the enemy” and that he viewed the activity as illegal.

Dr Yudhoyono said “co-ordinated military co-operation” on people smuggling, including naval patrols, would cease immediately.

“I have asked for that to be halted until everything is clear,” he said.

He said he wanted to make it clear that co-operation on combating people smuggling would not go ahead until he received an explanation from Mr Abbott.

“It’s impossible for us to continue when we’re not sure that there’s no tapping of Indonesian soldiers who are performing a duty for both countries,” he said.

Mr Abbott reiterated in parliament on Wednesday night he was sincerely sorry for the embarrassment that media reporting has caused the president – but stopped short of an apology for the spying.

“I want to express here in this chamber my deep and sincere regret about the embarrassment to the president and to Indonesia that’s been caused by recent media reporting,” Mr Abbott said.

The prime minister said he was encouraged by the president’s remarks about the strength of the bilateral relationship between Australia and Indonesia.

“Although obviously there are very serious issues that do need to be worked through in the near future between us,” he said before heading to a business dinner where he ducked journalists’ questions going in.

Dr Yudhoyono’s strong stance will pile more pressure on the prime minister to apologise for the spying, even though it occurred under the Rudd government.

He has so far refused to do so, saying Australia should not be expected to apologise for steps taken to protect itself in matters of national security, and was standing firm on Wednesday.

Earlier in parliament, Mr Abbott had regretted the embarrassment caused to President Yudhoyono, a very good friend of Australia.

“I do understand how personally hurtful these allegations have been, these reports have been, for him and his family,” he said.

But Mr Abbott said he would not “overreact” to the deepening diplomatic crisis, and insisted he would do all he could to strengthen the relationship.

The head of Indonesia’s State Intelligence Agency, Marciano Norman, said his organisation had been assured by its Australian counterparts they will not engage in similar activities again.

“They stated that now and in the future, the most important thing is that it won’t happen again,” he told reporters at Jakarta’s presidential palace.

“That’s their language, now and in future, they assured that it won’t happen again.”

In response to Jakarta’s suspension of military co-operation, Australian Defence Minister David Johnston’s office said they were still waiting for details as to “how this is going to play out”.

Indonesia has already recalled its ambassador from Canberra.