
Indonesia's censorship board made the ruling late Tuesday, but officials said they were unable to explain on what grounds the film "Balibo" had been banned.
A planned private screening organised by the Jakarta Foreign Correspondents Club was canceled at last minute after authorities told the organisers they would be risk prosecutions.
The ban also means that the film cannot be screened at the Jakarta International Film Festival, scheduled to begin Friday.
"We have been notified that the film didn't pass censorship," said Evi Julia, a Jiffest organiser.
Foreign Ministry spokesman Teuku Faizasyah said it "could hurt ties between Indonesia and Australia."
But he stressed that the ban was fully under the jurisdiction of the censorship board, and said the ministry did not intervene.
The film portrays five Australian-based journalists who were executed on the orders of Indonesian military chiefs to prevent news of the invasion reaching the outside world.
Jakarta has always maintained that the five died in crossfire as Indonesian troops fought East Timorese Fretilin rebels in Balibo.
An Australian coroner's investigation two years ago concluded that the journalists were shot and stabbed repeatedly by soldiers as they tried to surrender. The coroner called for war crimes charges against several Indonesian officers, including Captain Yunus Yosfiah who rose to become information minister in the late 1990s.
Australian police earlier this year launched a war crimes investigation into the deaths in the town of Balibo and a sixth reporter who died weeks later in the assault on Dili, East Timor's capital.