"Although Australia is the largest donor in the region as well as its most influential political actor, these geopolitical shifts have raised serious questions about the contemporary effectiveness of our regional relationships."
The paper says the erosion in Australia's standing in Pacific regional affairs can be seen in rising subregionalism and faltering support for Canberra's lead on regional initiatives.
"[The islands] are broadening unconventional diplomatic ties and preferring regional representation at the United Nations that excludes Australia."
The paper says Israel, Turkey, Germany, Russia, Cuba, Spain and the United Arab Emirates are rumoured to be seeking admission as post-forum dialogue partners with the Pacific Islands Forum.
The US and France have already been given observer status.
The paper warns that because of their "Lilliputian" economies, scarce natural resources, limited number of decision-making elites and dependence on external assistance, Pacific microstates are highly vulnerable to external pressure.
"Their vulnerability can be so extreme that even non-state actors, including criminal organisations and environmental groups, might have the potential to wield substantial influence," it says.
Only four of the 14 island members of the Pacific Islands Forum have any defence capacity, with the rest relying almost entirely on the absence of external threats and the protection of the international system for their security.
The paper says the emergence of China as an increasingly prominent actor in the Pacific is forcing Australia to reconsider its relationship with the islands.
While there is no direct challenge from Beijing, the extent and speed of Chinese engagement over the past decade have raised "legitimate concerns" in Canberra and Washington.
And tensions over Fiji have intensified the uncertainty about any regional response to China as a leading player in Pacific islands affairs, the paper says.
Since Fiji's suspension from the Pacific Islands Forum in 2009, Suva has sought closer relations with China and other Asia-Pacific states.
Beijing now has relations with eight forum island states, trade with the island states is increasing rapidly, and Beijing is now the third-largest aid donor behind Australia and the US.
Russia, Georgia and Iran have used their links with the islands to secure votes in the United Nations, the United Arab Emirates have offered a US$50 million ($64 million) climate change aid package, and the Arab League wants to open a regional office in Suva.
And while Australia has welcomed America's new emphasis on the Pacific, the paper warns the move reflects Washington's concerns about Canberra's influence.
"The US is reluctant to openly express criticism of Australia's handling of regional relations, but it's clear that there are genuine doubts about Australia's capacity to lead islands' opinion on relations with China," it says.
The paper says Chatham House analyst Cleo Paskal has argued that the US should not assume an identity of interests with Australia in the Pacific islands, citing Samoan testimony to Congress attacking Canberra's approach in the region as "inept", "heavy-handed" and unhelpful to US interests in maintaining close and friendly relations with the West.
The aid agency USAID has returned after a 16-year absence, diplomatic visits have included Secretary of State Hillary Clinton, and America's military muscle on Guam is expected to increase by 50 per cent as US troops leave Okinawa.
"The US is taking on a more direct role in protecting its own interests in the region, just as it did in the mid to late 1980s when it felt that managing Cold War challenges in the Pacific islands was beyond the capacity of Australia and New Zealand," the paper says.
It also warns that Beijing is concerned by reports that the motivation for the build-up on Guam is a strategic response to Chinese military modernisation and expansion, and that attitudes have changed in the Pacific states.
China, it says, is accepted by the island states as a friendly power.
