Rudd said the 255 people, who are refusing to leave their boat and earlier threatened to set it on fire, would have to be processed by United Nations refugee officials.
"It is irresponsible for any prime minister of Australia to send out a message of positive encouragement to people smugglers in the region," he told Fairfax Radio.
"It creates an industry which is one of the vilest on Earth and, secondly, it is potentially very dangerous for people putting their lives into the hands of such people.
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Rudd expressed sympathy but remained unmoved after being played a recording of a nine-year-old girl pleading for the people, who have fled Sri Lanka's war-torn north, to be given asylum.
"I am not going to be in the business of sending out messages to people smugglers in the regions, and more broadly across the world, that somehow this is a legitimate trade," Rudd said.
"It is not. It is obnoxious and vile."
Rudd discussed people-smuggling with Indonesia's President Sus