The move came after World Vision official Mohammad El Halabi appeared in an Israeli court in Beersheba on Thursday facing charges of using charity funds to support the Palestinian extremist group Hamas.
Australia's Department of Foreign Affairs said the allegations were "deeply troubling," adding that officials were seeking more information from World Vision and Israeli authorities.
"We are suspending the provision of further funding to World Vision for programmes in the Palestinian Territories until the investigation is complete," the department said in a statement.
Halabi, director of the Gaza branch of World Vision, was arrested June 15 at the Erez Crossing between Israel and the Gaza Strip, Israel's security agency Shin Bet said Thursday.
More than 7 million dollars a year, or 60 per cent of the annual budget for World Vision's Gaza branch, was diverted to Hamas by ElHalabi, according to the Shin Bet press release.
But Hamas' spokesman in Gaza, Abdulatif al-Qanou', said in an emailed statement on Thursday that Halabi is not in contact with Hamas nor connected to the movement.
World Vision Australia chief executive Tim Costello told Australian broadcaster ABC that Halabi had worked with the charity for 10 years and that he had no reason to believe the allegations.
"I am profoundly shocked, and they are very explosive allegations," Costello said.
"I was a lawyer for 15 years and I can tell you there are always two sides, and we have only heard one side."
World Vision said on its website that it denied any involvement in political, military or terrorist activities and that it hoped that Baradi would receive a "fair legal process."
The Australian government has given World Vision more than 5 million Australian dollars (3.8 million dollars) over the past three years for aid projects in the Gaza Strip, the ABC said.
World Vision is a worldwide Christian humanitarian aid charity set up in the US in 1950 and is active in nearly 100 countries. In 2015 it had annual revenue of just over a billion dollars.
- DPA