The center-left Labor government wanted to send China a message that "it can play in our sand-pit but it cannot own it", the paper quoted an "insider" as saying.
Australian Treasurer Wayne Swan declined to comment on the report when quizzed by reporters, saying only that the government was open to foreign investment but would safeguard national interest.
"We welcome foreign investment, we welcome it from everywhere, including from China, but we will apply decisions on a case-by-case basis in the national interest," he said.
The government said in February it would tighten scrutiny of investments into the country by state-owned funds in a sign of unease at their growing investment clout.
Large foreign investment proposals are examined by the Foreign Investment Review Board (FIRB), which plays an advisory role, although decisions come from the Treasurer.
Swan said Australia would focus on how close the relationship was between a prospective investor and its home government, and whether such an investment would hinder local competition.
Canberra would also study how much Australian participation in ownership, control and management of a company would remain, and whether investments could affect Australia's ability to protect its strategic and security interests.
Chinese interest in Australia's mining industry, a major world supplier of iron ore, coal, nickel and gold, has aroused concerns that Australia could lose some control over its natural resources to Beijing-backed firms eager to lock up supplies.
Australian miners, ranging from global heavyweights BHP Billiton and Rio Tinto to small explorers, are in the sights of state-backed Chinese firms.
Aluminum group Chinalco bought 9.3 percent of Rio this year, and it emerged on Thursday that Sinosteel, already bidding for iron ore explorer Midwest, was also looking at taking over another iron ore firm, Murchison Metals.
Sinosteel has approached the FIRB with a proposal to take over Murchison, according to a brief government notice signed on June 16, though Sinosteel has made no offer to Murchison.
Murchison, which itself is proposing to merge with Midwest, told the Australian Stock Exchange last month that Sinosteel had not approached Murchison in respect of a possible takeover bid.
At the same time, however, Murchison noted "media and analyst speculation that the company could be the next subject of a takeover bid by Sinosteel".
Sinosteel is offering A$1.36 billion in cash for Midwest, and has secured more than 40 percent acceptances for the bid. Sinosteel also has 2.4 percent of Murchison, the Australian said.
The FIRB is now reviewing Sinosteel's bid for Midwest before it moves on to consider the expression of interest in Murchison, a government official said on Thursday.
Treasurer Swan, responding to talk that the government was deliberately dragging its feet on the Sinosteel case, said it was normal for the FIRB to take up to 90 days to conduct a review.
"That final decision will be taken in the next 90 days," he said. "So what there is out there now, issued by the FIRB, is a firm timetable."