The 80-second video stars a British hoodie mocking the Australians for their lack of sporting talent and dismal chances for golds at the next Olympics.
He says: "I'll call you an Aussie muppet. You aint got what it takes son. The only gold you'll be picking up will be from a chocolate wrapper. Jog on.
"Oh, you might pick up something in diving. Yeah. Diving in football."
The hoodie, who is labelled as a "Brit with a mouth as wide as the Thames", goes on to say, "You won't win nothing Aussie, nothing, zilch. So mate, you may as well stay home. Because there's no way you're making it to London".
The video ends with the strap line: "Let's rip the Brits to bits in London 2012".
It was emailed to about 280,000 Australian athletes aged between 12 and 29 and encourages them to register their interest with the Australian Sports Commission.
The Australian government has said the film was not meant as an insult to the British, but as a light-hearted skit.
David Packwood, spokesman for the Australian Sports Commission, said: "We're not having a pop at you Brits. This is our way of getting Australians off their backsides and thinking, jeez, I might be able to be in London in 2012.
"The hoodie was not chosen to represent the British in any way. He was chosen to try to bait the Aussies. The idea was to stir up Australians, to say, 'The British are serious. What are you going to do about it?'."
The video comes after Australia was beaten by the UK in the medal tally at this year's Beijing Olympics. The UK finished with 19 gold medals to Australia's 14.
Following the Beijing triumph, UK tabloid The Sun sponsored vans to drive around Sydney and London featuring the slogan "Where the bloody hell were you?", a spin-off from the Australian government's 2006 ad campaign - "So where the bloody hell are you?"