Mr. Morrison said Australia would establish a defence and trade office in the west of the holy city.

Australia now recognises West Jerusalem as Israel's capital, Prime Minister Scott Morrison said on Saturday, but a contentious embassy shift from Tel Aviv will not occur until a peace settlement is achieved.

Mr. Morrison also committed to recognising a future state of Palestine with east Jerusalem as its capital when the city's status is determined in a peace deal.

“Australia now recognises west Jerusalem — being the seat of the Knesset and many of the institutions of government — is the capital of Israel,” Mr. Morrison said in a speech in Sydney on Saturday.

“And we look forward to moving our embassy to west Jerusalem when practical, in support of and after final status of determination,” he said, adding that work on a new site for the embassy was under way.

In the interim, Mr. Morrison said, Australia would establish a defence and trade office in the west of the holy city.

“Furthermore, recognising our commitment to a two-state solution, the Australian government is also resolved to acknowledge the aspirations of the Palestinian people for a future state with its capital in east Jerusalem,” he added.

Both Israel and the Palestinians claim Jerusalem as their capital.

Most foreign nations have avoided moving embassies there to prevent inflaming peace talks on the city's final status — until US President Trump unilaterally moved the US embassy there earlier this year.

Mr. Morrison first floated a shift in foreign policy in October, which angered Australia's immediate neighbour Indonesia — the world's most populous Muslim nation.

The issue has put a halt on years-long negotiations on a bilateral trade deal.

Canberra on Friday told its citizens travelling to Indonesia to “exercise a high degree of caution”, warning of protests in the Indonesian capital Jakarta and popular holiday hotspots, including Bali.

Mr. Morrison said it was in Australia's interests to support “liberal democracy” in the Middle East, and took aim at the United Nations he said was a place Israel is “bullied”.