By Mike Cherney

SYDNEY--Facebook Inc. has threatened to stop allowing Australians to share news on its site and on Instagram if lawmakers allow media companies to demand payment from digital platforms.

Australia in July unveiled a plan that would require Facebook and Alphabet Inc.'s Google to negotiate with media companies over payment. If the sides couldn't agree, an independent arbitrator would select one of their proposals. If enacted by Australia's Parliament, the rules could be a model for other countries that have long sought to compel tech giants to compensate local publishers.

In a statement dated Monday, Facebook outlined the impact it said the rules would have on users of its site and its Instagram photo-sharing platform. The sharing ban would apply to both local and international news stories, it said.

It also warned that removing news sharing could hurt publishers. In the first five months of 2020, Facebook said, it sent 2.3 billion clicks to Australian news websites at no charge--traffic it valued at roughly $148 million.

"We are left with a choice of either removing news entirely or accepting a system that lets publishers charge us for as much content as they want at a price with no clear limits," Will Easton, managing director for Facebook Australia & New Zealand, wrote in the statement. "Unfortunately, no business can operate that way."

In a letter of its own about two weeks ago, Google said the new rules would force it to give information to media outlets that could help them to artificially inflate their search-engine rankings--meaning it couldn't guarantee Google users would get the most relevant results.

"The law is set up to give big media companies special treatment and to encourage them to make enormous and unreasonable demands that would put our free services at risk," Mel Silva, managing director for Google Australia & New Zealand, wrote in the letter.

The Australian Competition and Consumer Commission, the regulator that developed the proposed rules, didn't have an immediate comment on Facebook's announcement. It earlier said Google's letter contained misinformation about what the proposed rules would require social-media platforms to do, though Google in turn disagreed with the regulator's characterization.

Media companies in Australia, including News Corp, owner of The Wall Street Journal publisher Dow Jones & Co., have supported the proposed regulations, saying they will prevent social-media giants from walking away from negotiations over payment. Platforms like Google and Facebook collect advertising revenue based on visits to their sites, and links to news articles that are shared by users could help to increase traffic.

News Corp is a dominant player in Australian media, with many newspapers including the Australian, the Daily Telegraph in Sydney and the Herald Sun in Melbourne.

Although Google and Facebook have resisted paying publishers for content, they have softened their stance recently and struck deals with certain publishers. Last October, News Corp reached a deal to let Facebook feature headlines from The Wall Street Journal and other Dow Jones media properties.

Facebook on Monday said news represents a fraction of what people see in their Facebook feeds and that news isn't a significant source of revenue for the company. Still, it said it has offered to invest millions of dollars in Australian news businesses and wants to support struggling news organizations.

The Australian government, led by conservative Prime Minister Scott Morrison, last year asked the competition regulator to develop a voluntary code that would govern the relationship between news businesses and digital platforms. After talks stalled, the government asked the regulator to develop a mandatory code.

A public-comment period on the proposed rules ended on Aug. 28, and final legislation could be introduced in Parliament soon.

Write to Mike Cherney at mike.cherney@wsj.com