The Melanesian Spearhead Group has knocked back West Papua's bid to become a full member of the group, while elevating Indonesia's status.
In a statement, Papua New Guinea's Prime Minister, Peter O'Neill, says the United Liberation Movement for West Papua will be given observer status as a "development partner representing the welfare of Melanesian people living outside."
Mr O'Neill says the decision reaffirms that representation at the sub-regional level must be made by mandated leaders elected by their people.
The ULMWP had hoped to follow in the footsteps of New Caledonia's FLNKS in obtaining full MSG membership without being a sovereign government, thus giving it its first recognition in an international fora since it was incorporated into Indonesia.
But Indonesia has embarked on a diplomatic push in the region in recent months, trying to prevent the West Papuans' bid and to increase its status in the MSG.
Jakarta's outreach has been successful, with Indonesia being elevated from observer status to that of an associate, to be represented by the elected leaders of the Asian country's five provinces with significant traces of Melanesian stock.
Mr O'Neill says this decision will pave the way for consultation between PNG and Indonesia, saying he believes the MSG has Jakarta's respect for the honesty and nature of its offer of cooperation over the sensitive issue of Papua.
The decision was brought forward by one day so Fiji's Prime Minister, Frank Bainimarama, could depart on Friday.