Rudd and Papua New Guinea Prime Minister Peter O'Neill signed an agreement in the Australian east coast city of Brisbane on Friday that will enable Australia to deport refugees to its developing neighbour.
"From now on, any asylum seeker who arrives in Australia by boat will have no chance of being settled in Australia as refugees," Rudd told reporters.
The move, described by Rudd as "very hard line," aims to deter an escalating number of asylum seekers who travel to Australia in rickety fishing boats from poor, war-torn homelands through other countries such as Indonesia and Malaysia.
The growing influx is a major political problem for Rudd's Labor Party, which is the clear underdog in elections expected within months.
The policy was condemned by refugee and human rights advocates.
"The new plans to resettle all asylum seekers that are found to be refugees in PNG shows not only a complete disregard for asylum seekers but absolute contempt for legal and moral obligations," Graeme McGregor, Amnesty International's refugee campaign co-ordinator for Australia, said in a statement.
David Manne, executive director of Australia's Refugee and Immigration Legal Center, described it as "a fundamental repudiation of our commitment to protecting refugees."
Manne described PNG as an unsafe country where violence is widespread and serious human rights abuses are a daily occurrence.
But Rudd said the policy met Australia's obligations under the United Nations' Refugee Convention. PNG is a signatory of the same convention that sets out refugees' rights.
The rules will apply to asylum seekers who arrive from Friday.
Asylum seekers who arrive by boat would continue to have their refugee claims assessed in Australia and at detention camps in Papua New Guinea and Nauru.
Those who are found not to be genuine refugees could return to their home countries or another country other than Australia.
Australia would help genuine refugees settle in Papua New Guinea — a diverse tribal society of more than 800 languages and 7 million people who are mostly subsistence farmers.
By Friday, 15,728 asylum seekers had arrived by boat this year. The arrivals are on track to exceed last year's total of 17,202 as well as the government's target of resettling 20,000 refugees a year.
Iran has become the biggest source country. Asylum seekers from Iran last year accounted for one in seven arrivals. This year, they make up one in three.
Indonesia has announced it will stop issuing visas on arrival to Iranians in a bid to stem the flow to Australia.
Amir Syamsuddin, justice and human rights minister, signed a decree on Thursday revoking the visa-on-arrival option for Iranians that has been in place since 2005, said Maryoto Hadi, spokesman for the immigration office. The new restrictions start Aug. 20.
Indonesia has granted visas on arrival to more than 60 countries, including Iran, in a bid to boost tourism by making it easier for foreigners from those nations to obtain visas for $25 at 15 airports and 21 seaports.
Rudd said his government would negotiate with other of its neighbours in a bid to restrict visa access from other asylum-seeker source countries.
Afghanistan, Sri Lanka, Pakistan, Vietnam, Iraq, Bangladesh and Myanmar are the next largest sources of asylum seekers arriving on Australian shores.
O'Neill set no limit on how many asylum seekers his country was prepared to accept.
"It is not going to be easy, but of course Papua New Guinea is blessed with a large land mass and a very small population so there is enough assistance that we can give to the Australian government," O'Neill said.
Australia is PNG's former colonial master and is now its largest source of foreign aid. In return for accepting refugees bound for Australia, Rudd said Australia will redevelop a hospital in PNG's second largest city reform the country's university sector.
The new policy echoes that of a previous Australian government that in 2001 has also pledged that asylum seekers who arrived by boat would never be accepted by Australia.
That policy all but stopped the asylum seeker traffic.
Some refugees spent years in an Australian-run detention camp on the tiny Pacific atoll of Nauru before Australia eventually resettled them because no other country would.
Associated Press writer Niniek Karmini in Jakarta contributed to this report.