The discovery was made after an exceptionally well-preserved partial skull of the new extinct species was unearthed from the Riversleigh World Heritage Area, whereas only teeth or jaws of most other extinct koala species have been found.
The small, ancient koala was given the species name Litokoala dicksmithi, in honour of a famous Australian aviator, adventurer and philanthropist - Dick Smith.
"We chose the name to thank Mr Smith for his long-term financial support of Australian science, in particular, of fossil research at the Riversleigh World Heritage Area in north western Queensland," said Dr Karen Black, University of New South Wales (UNSW) paleontologist, who led the research.
The discovery brings the number of known extinct koala species to 18. Today, only one species of koala is alive.
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"The discovery of Litokoala dicksmithi is particularly significant because it is one of only two fossil koala species that are known from material preserving the facial region including the snout," Black said.
"The other species, called Nimiokoala greystanesi, which was also discovered at Riversleigh, had a skull that was very possum-like in appearance.
"Litokoala dicksmithi, however, appears to have been much more closely related to the modern koala with numerous similarities in the skull suggesting a more koala-like, rather than possum-like, face," Black said.
"An interesting feature of the Litokoala skull is the extremely large eye sockets which suggest the intriguing possibility that these koalas were nocturnal with greater visual acuity than the living koala," Black said.
"Combined with its small body size, this suggests that Litokoala dicksmithi was a more active, agile tree climber than its sleepy, relatively sedentary, cousin that we know," Black said.
Unlike today's eucalypt-munching koala species, Litokoala dicksmithi fed on the rainforest plants that covered much of northern Australia 20 million years ago and may also have eaten some fruit.