The US president's suggestion on Wednesday that the destroyed Gaza Strip be redeveloped into the "Riviera of the Middle East" has been widely denounced, including by European and Middle Eastern nations.
The White House later walked back some of the president's comments, saying Palestinians would be temporarily relocated rather than permanently displaced, and that no decision had been made about sending in US troops.
Peter Dutton earlier on Thursday said Mr Trump was a "big thinker and a deal maker" after he proposed the US take over and redevelop Gaza.
But during a press conference in Canberra, the opposition leader clarified he supported a two-state solution.
Australia Palestine Advocacy Network President Nasser Mashni said Palestine was not a bargaining chip and no one, including Mr Trump, had the right to dictate their future.
"Dutton is legitimising a plan to erase Palestinians from their homeland under the guise of peace," he told AAP.
"Ethnic cleansing is not 'big thinking' it is a crime against humanity. To support it is to support the commission of a crime."
Mr Dutton said Mr Trump hadn't become president for the second time "by being anything other than shrewd".
"I think a lot of people ... are coming to grips with it as well as he's a big thinker and a deal maker," Mr Dutton told 2GB radio on Thursday.
"There's a desire for peace here from every reasonable person and hopefully it can be achieved."
Dr Tamer Morris, a researcher in international law at the University of Sydney, wrote in an article that it would not be legal for the US to take over someone else's territory.Â
The use of force has been prohibited in international law since the end of the second world war and was one of the foundations since the creation of the United Nations, he wrote.
Prime Minister Anthony Albanese reiterated Australia's long-standing support for a two-state solution.
"Australia's position is the right of both Israelis and Palestinians to live in peace and security in their own states and that remains our position," he told Nine's Today Show.
Labor MP Josh Wilson said Australia remained a supporter of a two-state solution which delivered self-determination for Palestinians.
"There can be no suggestion that another country would unilaterally 'own' Gaza and displace Palestinians," he said.
Jewish groups in Australia have already rejected Mr Trump's initial proposal to relocate the Palestinian residents.
"The question of whether some Gazans choose to remain in the territory through this process, temporarily relocate or are permanently absorbed by neighbouring states is ultimately a decision for those affected, most of all, Gaza's civilian population," Executive Council of Australian Jewry president Daniel Aghion said.
The Australia/Israel and Jewish Affairs Council said it was hopeful the cycle of violence in the Middle East could be broken.
But it also expressed "strong concern over any hint that the US president is suggesting forcibly evacuating Gazans".
Mr Trump repeated his previous call for Jordan and Egypt to take in Gazans, saying there was no alternative for them but to abandon the strip, adding he would support resettling Palestinians "permanently".
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