Australian Prime Minister Julia Gillard dismissed mounting speculation Friday about her future, vowing to stay in the job despite a crushing court blow to the government's asylum-seeker policy.

The nation's highest court on Wednesday scuttled Canberra's proposal to send 800 boatpeople to Malaysia in a huge embarrassment for Gillard and her fragile Labor government, sparking fevered talk that her days are numbered.

The Sydney Morning Herald said the Labor Party was alive with chatter about a possible replacement for the country's first female prime minister, whose credibility was already under pressure before the court setback.

Former prime minister Kevin Rudd, who Gillard ousted last year to take the top job, and Defence Minister Stephen Smith have been touted as potential successors.

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Most newspapers ran similar stories with the Sydney Daily Telegraph's front-page headline screaming "Gillard On Notice", citing senior government figures saying she had "lost her authority".

"This is about authority and whether she can assert her authority because she hasn't got it now," one senior party figure was quoted as saying.

The minority coalition government's popularity is at record lows in opinion polls, with an unpopular tax on carbon pollution adding to its woes, but Gillard insisted she remained the best person for the job.

"I'm not going anywhere," she told ABC radio.

"I'm the best person to do this job. And I'll continue to do it. And what this job is about is leading the nation to a better future."

Gillard said her government had taken some "tough" and "bold" decisions and several cabinet colleagues quickly gave her their backing, including Trade Minister Craig Emerson who described her as "a strong leader".

"They (Australians) expect leaders to make tough decisions even if those decisions aren't always popular in the short term," he said.

The government had heralded the Malaysia policy as a sure-fire strategy to deal with the politically divisive asylum-seeker issue and it is currently taking legal advice on what to do next.

The nation's top court found that under Australian law the government could not send asylum-seekers to be processed in a country that was not bound to adequately protect them.

Malaysia is not a signatory to the UN convention on refugees.

- AAP