Australia has made a "huge" diplomatic error by ditching a multi-billion-dollar order for French submarines in favour of an alternative deal with the US and UK, France's envoy to Canberra said on Saturday.

Canberra announced on Thursday it would scrap its 2016 deal with France's Naval Group to build a fleet of conventional submarines and instead build at least eight nuclear-powered ones with US and UK technology after striking a trilateral security partnership.

The move caused fury in France, a NATO ally of the US and UK, prompting it to recall its ambassadors to Washington and Canberra, and also riled China, the major rising power in the Indo-Pacific region.

Malaysia said on Saturday Canberra's decision to build atomic-powered submarines could trigger a regional nuclear arms race, echoing concerns already raised by Beijing.

"It will provoke other powers to also act more aggressively in the region, especially in the South China Sea," the Malaysian Prime Minister's office said, without mentioning China. 

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Beijing's foreign policy in the region has become increasingly assertive, particularly its maritime claims in the resource-rich South China Sea, some of which conflict with Malaysia's own claims.

"This has been a huge mistake, a very, very bad handling of the partnership - because it wasn't a contract, it was a partnership that was supposed to be based on trust, mutual understanding and sincerity," France's Ambassador Jean-Pierre Thebault told reporters in Canberra before returning to Paris.

France has previously branded the cancellation of the deal - valued at $40 billion in 2016 and reckoned to be worth much more today - a stab in the back.

'Deep disappointment'

US State Department spokesperson Ned Price said France was a "vital ally" and that the US would work in the coming days to resolve the differences.

Australia said it regretted the recall of the French ambassador and that it valued the relationship with France and would keep engaging with Paris on other issues.

Thebault said he was very sad to have to leave Australia but added there "needs to be some reassessment" of bilateral ties.

In separate comments made to SBS radio, Thebault said of the ditched agreement: "It was not about selling salads or potatoes, it was a relationship of trust at the highest level covering questions of the highest level of secrecy and sensitivity."

The row between Paris and Canberra marks the lowest point in their relations since 1995, when Australia protested France's decision to resume nuclear testing in the South Pacific and recalled its ambassador for consultations.

Public opinion in France, where President Emmanuel Macron is expected to seek a second term in an election due next year, has also been very critical of Australia and the US.

"You can understand for geopolitical reasons Australia getting closer to other anglophone countries like the United States and Britain," said Louis Maman, a Parisian surgeon out for a stroll on Saturday on the Champs-Elysees.