Australian teen Jamie Murphy has walked free from a Bali police station after it was confirmed that white powder found on him was not illicit drugs but crushed up painkillers.

The Bali nightclub where the 18-year-old from Perth was grabbed by police has now apologised for using "excessive force" and ordered the guard to undergo security training.

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Sky Garden Management released a statement saying they would like to "extend a sincere apology to Jamie, his family and friends. Our company procedure is to hand over suspects peacefully to police if we feel they've committed a crime at Sky Garden," it read.

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"We have reprimanded the security in question and he will not be permitted to come back to work until he has completed and passed another round of police security training."

The club said the guard was "ordered" to hold up the teenager's face so police could take his photo but said "we feel he used too much 'excessive force' which is clearly unacceptable under the circumstances."

The dramatic picture showed Murphy with his eyes closed and a guard's hands around his neck, prompting a major national news story when Murphy was arrested and handed over to police by security forces for allegedly carrying a bag containing white powder.

"It's not mine, I haven't taken it, what are you doing, it's not mine. It's not mine," he shouted during his arrest, which was captured by Channel Nine cameras.

Australian Jamie Murphy is escorted by plain-clothed police officers upon his release from police custody in Bali. Photo / AP
Australian Jamie Murphy is escorted by plain-clothed police officers upon his release from police custody in Bali. Photo / AP

After his arrest on Tuesday morning, the teenager spent two nights in police custody with the terrifying threat of a maximum 12 years in an Indonesia jail hanging over his head.

He was released by Bali police overnight and into the care of his distraught parents Brendan and Anna, who flew to Bali early yesterday from their Perth home to join their son.

Authorities said Murphy didn't know what he was purchasing when he bought the white powder off the street.

The head of the police forensics laboratory in Denpasar, Koesnadi, confirmed to News Corporation that the 1.46 grams of white powder inside a small ziplock plastic bag did not contain any illegal drugs.

Koesnadi said the powder contained at least four materials, including caffeine and painkillers.

"We have tested the white powder and it's not drugs," Koesnadi said. "It's a mix of at least four materials, including caffeine and analgesics."

Blood and urine tests on Murphy, to test for the presence of drugs, were also negative.