At least four people have died after a boat carrying Australia-bound asylum-seekers sank, amid ongoing debate over the new policy.
The boat sank off the Indonesian island of Java, the transit point for people-smugglers.
At least 157 people have been rescued. It is not clear how many are missing.
Meanwhile, Australia's immigration minister said he would investigate abuse claims at the country's offshore processing centre in Papua New Guinea.
Prime Minister Kevin Rudd announced a new asylum policy last week, ahead of polls expected to be announced soon.
Under the policy, asylum-seekers arriving by boat in Australia will be sent to Papua New Guinea (PNG) for processing, and those whose refugee claims are upheld will be settled in PNG, rather than Australia.
Australia has experienced a sharp increase in the number of asylum seekers arriving by boat in recent months. But critics have accused Australia of avoiding responsibility and passing on its problem to a developing nation.
Mr Rudd said that the sinking underlined the need for a policy shift, saying the government had to send "a very clear message to people-smugglers to stop sending people by boat to Australia".
"We are seeing too many drownings, we are seeing too many sinkings, too many innocent people being lost at sea."
PNG is to receive Australian investment as part of the deal. But some PNG politicians say the agreement could cause tensions on the island.
Opposition spokesman Tobias Kulang said PNG had "become a dumping ground for Australia's inadequacies".
"This is an appalling performance by Australia, which with its monetary wealth is able to pass the buck on to poorer countries," he said.
'Helpless and hopeless'
The latest sinking, which happened on Tuesday night, involved passengers who said they were from Iraq, Iran, Sri Lanka and Syria.
At least two children are among the dead. More people are feared missing but officials still do not know the exact number of people who were on board.
Fishermen first spotted the asylum seekers - men, women and children - swimming to the shore near the West Java town of Cidaun on Tuesday evening, the BBC's Alice Budisatrijo in Jakarta reports.
The head of the local rescue agency told the BBC they were now being held in a nearby immigration facility.
Another boat carrying around 38 asylum seekers has also been stopped near Christmas Island, reports say.
Many asylum seekers seek to journey to Christmas Island, which is the closest part of Australia to Indonesia and lies 1,600 miles north-west of mainland Australia.
Meanwhile, Immigration Minister Tony Burke said he would travel to Manus Island, Australia's offshore processing centre in PNG, after allegations of abuse there emerged.
A former security manager, Rod St George, told Australia's Special Broadcasting Service that some detainees had been raped and assaulted.
He said the the facilities at the site were not "even fit to be used as a dog kennel".
Mr Burke has described the allegations as "horrific", and said that he intended to "work through" issues at the island.
Asylum policy is expected to be a key issue in Australia's elections, which must take place by 30 November.
An opinion poll on Tuesday suggested that the opposition coalition led Mr Rudd's Labor party by 52% to 48% after preferences.
However, Mr Rudd is still polled as voters' preferred prime minister, at 50%, compared to opposition leader Tony Abbott's 34%.
Mr Rudd ousted Julia Gillard as Labor Party leader last month, amid dismal pre-election polling figures.
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