Scott Morrison is demanding clarity on reports China has banned Australian coal.
The prime minister said the Chinese state-owned media reports had not yet been confirmed by the government in Beijing.
"Until we are in a position to have that clarified then we can only treat this as media speculation," he told reporters on Tuesday.
"If that were the case, then that would obviously be in breach of WTO rules, it would be obviously in breach of our free trade agreement, and so we would hope that is certainly not the case."
Mr Morrison said a Chinese ban on Australian coal would be a lose-lose for both countries.
However, he noted India and Japan were also large buyers of Australian coal, meaning the industry had a "diverse customer base".
Trade Minister Simon Birmingham is deeply troubled by the reports.
Dozens of ships carrying Australian coal have been stranded off the coast of China for months due to supposed environmental problems.
But overnight, a Chinese state-owned media outlet reported power plants had been directed to stop taking Australian coal.
"We see these reports and obviously are deeply troubled by them," Senator Birmingham said.
"They, if true, would indicate discriminatory trade practices being deployed by Chinese authorities and we would urge them to rule that out swiftly."
It's the latest crackdown by China on Australian goods, which has so far hit consumables including beef, wine, barley and seafood, plus timber.
Senator Birmingham said the Australian government was close to finalising a complaint to the World Trade Organisation over Chinese tariffs imposed on barley.
"We are well prepared in terms of the analysis we have undertaken to mount that case," he said.
Australian exporters heavily reliant on China have been brought to their knees by deteriorating trade ties.
Senator Birmingham said he could understand if Australian exporters looking to do business in China were more sceptical about entering into contracts.
There are suspicions the trade tensions have grown from China's grievance list spanning Australia's foreign investment rules, banning Huawei from the 5G network, and the push for an inquiry into the origins of COVID-19.
Meanwhile, miners were proving the biggest weight on an ASX trading slightly lower, after China reportedly banned Australian coal and its steel producers called for action on iron ore prices.
The S&P/ASX200 benchmark index was lower by 9.6 points, or 0.14 per cent, to 6650.6 at 1200 AEDT on Tuesday, following mixed results on Wall Street.
The All Ordinaries was lower by 17.6 points, or 0.25 per cent, to 6882.7.
The materials sector, which includes the miners, was down 1.55 per cent after Chinese media reported power plants have been directed to stop taking Australian coal.
Dozens of ships carrying Australian coal have been stranded off the coast of China for months due to supposed environmental problems.
The apparent coal strike is the latest crackdown by China on Australian goods, which has so far included beef, wine, barley and seafood, and timber.
Yancoal fell 9.63 per cent to $2.25. Whitehaven Coal was down 6.5 per cent to $1.51.
There is also concern for iron ore producers. Reuters has reported China's steel producers have pushed for a regulatory probe into skyrocketing prices and a crackdown on any wrongdoing.
The big three miners were all lower. BHP dropped 2.24 per cent to $41.78, Fortescue sunk by 3.06 per cent to $21.48 and Rio Tinto decreased by 1.04 per cent to $112.75.
The other sector struggling was energy, down 1.2 per cent.
There was better news in the financial sector, which was down 0.09 per cent.
Shareholders of banks and insurers can expect better dividends next year after a financial regulator removed limits designed to ensure the institutions' stability during the pandemic.
The Australian Prudential Regulation Authority said it would from January 1 remove its requirement that the companies retain at least half their earnings.
APRA imposed the limit in July, which left shareholders of banks and insurers with greatly reduced dividends.
ANZ was up by 0.02 per cent to $23.18, the Commonwealth declined by 0.26 per cent to $83.70, NAB dropped by 0.12 per cent to $23.52 and Westpac dipped by 0.52 per cent to $19.92.
In other news, the Australian Competition and Consumer Commission has raised concern with Woolworths' proposal to buy 65 per cent of PFD Food Services.
The regulator said the bid is likely to increase Woolworths' bargaining power with food manufacturers.
Shares were higher by 0.48 per cent to $39.36.
Gaming group Crown confirmed it will defend legal action accusing it of misleading investors over possible anti-money laundering breaches.
Law firm Maurice Blackburn alleged misleading or deceptive conduct from December 2014 to October this year.
It alleges the casino misrepresented it had effective systems to ensure it met anti-money laundering obligations.
Shares were lower by 0.30 per cent to $9.76.
Earlier in US trade, stocks closed mostly lower as investors waited to see whether politicians can break a stalemate and provide economic stimulus.
Stocks initially headed higher as Americans began receiving the country's first vaccinations against COVID-19.
The S&P 500 fell 15.97 points, or 0.4 per cent, to 3,647.49. The Dow Jones Industrial Average dropped 184.82 points, or 0.6 per cent, to 29,861.55. The Nasdaq rose 62.17 points, or 0.5 per cent, to 12,440.04.
The Aussie dollar was buying 75.39 US cents at 1200 AEDT, the same as at Monday's close.
