Australia is joining an international military mission to help guard oil tankers from attacks in the Strait of Hormuz.
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The Australian Defence Force will contribute troops, a surveillance plane and a Navy frigate to a US-led effort to protect shipping lanes from Iran.
Prime Minister Scott Morrison said the "modest, meaningful and time limited" contribution was in Australia's national and economic interests.
"The government has decided it's in Australia's national interests to work with our international partners to contribute," he told reporters at Parliament House on Wednesday.
"Our contribution will be limited in scope and it will be time-bound and it will be part of an international mission, separate from any other matters in the region."
At least 15 per cent of crude oil destined for Australia - and up to 30 per cent of refined oil - transits through the Persian gulf.
"So it is a potential threat to our economy," Mr Morrison said.
The warship will be redirected from an anti-piracy operation in the Middle East, while the Australian troops will be based in the headquarters that are coordinating the US-led maritime security mission.
Initially, Australia will be involved for at least six months.
However, the Prime Minister made it clear the mission could be extended.
The deployment raises questions about the rules of engagement, and what Australian troops will be able to do in response to any aggressive behaviour that comes their way.
Australia's Chief of the Defence Force Angus Campbell was asked what the frigate would do if a commercial ship was seized, and whether his troops would be allowed to open fire.
"Our people are very well trained and they will be operating under international law," General Campbell said.
"Their presence will be to support security of shipping and freedom of navigation."
So far the US-led international coalition includes the United Kingdom, Australia and Bahrain.
But the mission will be a key topic of discussion when Mr Morrison meets the leaders of the seven wealthiest advanced countries in France this weekend.
Mr Morrison has spoken to the UK's new leader Boris Johnson several times ahead of his trip to Biarritz.
"(The G7 meeting) is an important time, I think, to reinforce these shared values in today's world - democracy, respect for human rights, international law and free markets," he said.
