Defence Minister David Johnston has expressed regret for his "rhetorical flourish" when he said government-owned builder Australian Submarine Corporation "couldn't build a canoe".
Speaking in the Senate yesterday, he ripped into ASC, complaining it was likely $600 million over budget in building new destroyers for the Royal Australian Navy.
Today Mr Johnston said he never intended to cause offence.
"I regret that offence may have been taken," he told the Senate on Wednesday.
"I off course was directing my remarks at a legacy of issues and not the workers in ASC whom I consider to be world class."
Prime Minister Tony Abbott has distanced himself from Senator Johnston's comments, issuing a statement in support of the Adelaide-based ASC.
Mr Abbott said despite a $350 million budget blowout on the air warfare destroyer program the government was working closely with ASC to improve shipyard performance and productivity.
"It is early days but the government is confident that ASC and its partners will successfully turn the corner on this important build," he said in a statement.
Earlier today South Australia's Liberal Party leader has called for an apology from Mr Johnston over his comments.
Steven Marshall described the remarks as "deplorable".
The Minister needed to apologise to the workers at ASC and the people of South Australia, Mr Marshall told ABC Radio.
Last night the Minister said "You wonder why I'm worried about ASC and what they're delivering to the Australian taxpayer."
"You wonder why I wouldn't trust them to build a canoe?"
The comments were seized on by Labor, with shadow defence minister Stephen Conroy saying it was clear the Government was preparing to break an election promise and buy submarines overseas rather than build them in Australia.
Before the election Senator Johnston promised that a coalition government would build Australia's new submarine fleet in Adelaide.
A senior Liberal said Senator Johnston's comments were "breathtaking", coming just a fortnight after he apologised to ASC chairman Bruce Carter for being critical of the agency's work.
The West Australian understands Senator Johnston told Mr Carter over dinner in Adelaide that he would refrain from criticising the ASC in future.
"This whole process has been undermined by Johnston and his office from the very beginning," a senior Liberal said.
The Government is thought to be looking at Swedish and German- designed submarines to replace the Collins class fleet. A Japanese- designed sub is now less likely.