Foreign Minister Julie Bishop told reporters in Brisbane that the situation was "a tragedy" and that the government was still trying to determine how many casualties there were.
"We are still seeking to determine the actual outcome" she said. "We call on all sides for calm to de-escalate the tensions."
Ms Bishop said there were about 70 AFP officers there.
"I know students have been shot but we are still trying to determine whether there have been deaths and how many have been injured. We will be monitoring the situation closely."
Thousands of students at the University of Papua New Guinea in the capital of Port Moresby have been protesting and boycotting classes for weeks amid growing political unrest in the Pacific island nation.
The governor of Oro Province Gary Juffa, a critic of the O'Neill government, said on Twitter that he had spoken directly with students at the protest.
"Informed that several were shot," Juffa said, adding that the incident started with an argument between a metropolitan police superintendent and a student.
PNG's opposition made a fourth unsuccessful attempt this week to unseat O'Neill's government via a no confidence bid, gaining some support from members of the leader's own party.