Australian Prime Minister Julia Gillard said she had asked a lawmaker embroiled in a scandal over payment for prostitutes to quit the Labor Party in a blow to her minority government.

Craig Thomson, whose vote is key to Gillard, is alleged to have used a former employer's credit card to pay for prostitutes and lavish meals and make cash withdrawals before he became an MP.

Gillard said Thomson strongly denied the allegations and was entitled to the presumption of innocence but she had made a judgement call based on the need to preserve parliament's reputation.

"I indicated to Mr Thomson that I had decided it was appropriate for him to no longer participate in Labor caucus; to be suspended from the Labor Party," Gillard told reporters in Canberra, on Sunday.

"Mr Thomson indicated to me that over recent weeks he has been thinking very deeply about these questions.

"And he had also reached the view that it was in the interests of the Labor Party that he no longer participate in Labor Party meetings or the life of the Labor Party."

The prime minister said she had also asked parliamentary speaker Peter Slipper, who faces claims he sexually harassed a male staffer and misused taxi services, to stand aside for "a further period of time".

Gillard, whose centre-left Labor government is flailing in opinion polls, has led a fragile minority government since August 2010 elections were deadlocked and she rules with the support of independents and a Greens MP.

Gillard said both Thomson and Slipper, who is an independent lawmaker, denied the allegations against them, and she would not prejudge them.

Commenting on why it had taken her so long to act on Thomson, who would likely lose his New South Wales seat to the conservatives if an election were held now, Gillard said a line had been crossed.