JERUSALEM/ASUNCION (Reuters) - Israeli Prime Minister Benjamin Netanyahu ordered the closure of Israel’s embassy in Paraguay on Wednesday, hours after the Latin American nation’s new government announced it would move its embassy back to Tel Aviv from Jerusalem.

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Paraguay’s decision was a blow to Israel’s efforts to achieve external recognition of Jerusalem as its capital, which appeared to have gained some traction this year with the United States, Guatemala and Paraguay opening embassies there. Most countries do not recognize Israeli sovereignty over the entire city and say its final status should be set in peace talks.

Paraguay’s foreign minister called Israel’s reaction “disproportionate.” Paraguay President Mario Abdo defended his decision as part of an effort to support “broad, lasting and just peace” among Israelis and Palestinians.

“Paraguay is a country of principles,” Abdo said on Twitter.

Abdo took office last month and belongs to the same conservative party as his predecessor Horacio Cartes, who inaugurated Paraguay’s new embassy in Jerusalem in May.

The Palestinians said their foreign minister, Riyad al-Maliki, met Abdo two weeks ago and hailed Paraguay’s change of mind as “a new Palestinian diplomatic achievement.”

“Minister Maliki exerted a big effort during his meeting with the new president who instructed his foreign minister to arrange the issue,” the Palestinian foreign ministry said in a statement.

Israel acted swiftly after the news broke and a statement in English from the Prime Minister’s office said: “Israel views with utmost gravity the extraordinary decision by Paraguay which will cloud bilateral relations.”

The status of Jerusalem is one of the thorniest obstacles to forging a peace deal between Israel and the Palestinians. Israel regards all of the city, including the eastern sector that it annexed after the 1967 war, as its capital.

But the Palestinians, with broad international backing, want East Jerusalem for the capital of a future state they hope to establish in the occupied West Bank and Gaza Strip. Negotiations between the two sides broke down in 2014.

In December, U.S. President Donald Trump recognized Jerusalem as Israel’s capital, reversing decades of U.S. policy and upsetting the Arab world and Western allies. The United States opened a new embassy in Jerusalem on May 14. Guatemala and then Paraguay opened embassies there afterward.

Netanyahu has attempted to persuade other countries to follow their lead.

On Wednesday while meeting Bulgarian Prime Minister Boyko Borissov, Netanyahu said: “I appreciate your decision to open an honorary consulate in Jerusalem, and I hope, I hope, I hope it’s the first step toward establishing the Bulgarian embassy in Jerusalem.”