Sydney -

Papua New Guinea's Prime Minister Peter O'Neill has sacked his attorney general, reports said on Wednesday, adding to the Pacific nation's growing political turmoil centred on fraud allegations against its leader.

The removal of top lawyer Kerenga Kua comes as O'Neill faces possible arrest over corruption claims which he says are politically motivated.

“It is unfortunate that I've had to take this decision at this time but I must do so in the interest of government and its stability,” O'Neill said in a statement cited in the Post-Courier newspaper.

The sacking follows a dramatic 48 hours in PNG politics, with O'Neill on Monday served with an arrest warrant over fraud allegations at the recommendation of the nation's corruption watchdog.

The prime minister reportedly refused to leave Parliament on Monday after the warrant was issued, and launched an urgent legal bid to have it stayed.

Kua is said to have opposed the government's plans to change the constitution to allow the ruling party to nominate a candidate if a prime minister is removed by a vote of no-confidence.

O'Neill, whose ruling People's National Congress has the most seats in parliament, said that opposing the amendment was “undermining cabinet and government solidarity”.

The fraud scandal relates to millions of dollars in illegal fee payments to law firm Paul Paraka Lawyers.

The prime minister vehemently denies any wrongdoing and claims the allegations are politically motivated.

His lawyers are arguing for a stay of the warrant while O'Neill announced an independent commission of inquiry into issues surrounding payments to Paraka Lawyers.

He said key government agencies, including the department of the attorney general and justice, the police and the prime minister's Office, had all been compromised.

“Many of our institutions have been systematically corrupted. We need to now get an independent inquiry,” O'Neill said, in comments cited by The National newspaper in PNG.

Opposition leader Belden Namah called on O'Neill to resign.

“He must preserve the integrity of the office of the prime minister and must present himself to police and resign,” he said.

“He has been amending the constitution and other laws to entrench himself in power and to serve his appetite for greed and selfishness.”

Australia refused to be drawn on the turmoil in its close neighbour, with Foreign Minister Julie Bishop saying they were “matters for the PNG government”. - Sapa-AFP