The Organisation of Islamic Cooperation will meet tomorrow in Saudi Arabia, where anger at a perceived policy shift will be on the agenda.

The government sparked a backlash after refusing to use the term "occupied" for the ancient city, deeming it unhelpful to the Middle East peace process.

Attorney-General George Brandis told a Senate estimates committee this month that the term "occupied" East Jerusalem was "freighted with pejorative implications, which is neither appropriate nor useful".

But Labor says the decision is embarrassing to Australia and as long as the territory is occupied there's no reason to change the term.

Opposition Leader Bill Shorten assured the Islamic delegates Labor's position on East Jerusalem had not changed.

"The territory is occupied, and that's why Labor describes it like that," a spokesman for Mr Shorten told AAP.

Trade sanctions not ruled out

Speaking to media ahead of a meeting between Foreign Minister Julie Bishop and ambassadors from Islamic nations today, Iraqi ambassador Mouayed Saleh said trade sanctions had not been ruled out.

A threat by the OIC and Arab League to block Australian agricultural products could still stand. Such a move would be disastrous for Australian farmers, whose top export markets for sheep and cattle are in the Middle East.

"That was considered and that’s going to take some time," Mr Saleh said.

"Australia needs to look at that."

He also referred to United Nations, which he said "acknowledged that East Jerusalem was occupied" in 1967.

Head of the Palestinian Authority delegation to Canberra Izzat Abdulhadi also addressed media, saying it was "very important that Australia adhere to the United Nation terminology".

Palestine's ambassador to Aust says meeting btwn Foreign Min Julie Bishop & 23 Arab & Islamic diplomats was a bit 'tense'. — Karen Middleton (@KarenMMiddleton) June 19, 2014

Palestine ambassador says Minister Bishop said Aust agrees East Jerusalem is occupied - 'small o' - but wont call it Occupied - 'capital O' — Karen Middleton (@KarenMMiddleton) June 19, 2014

Meeting was 'constructive': Bishop

Ms Bishop issued a statement following the meeting today, describing the meeting as "constructive".

"At this meeting I provided a letter reaffirming that there has been no change in the Australian government’s position on the legal status of the Palestinian Territories, including East Jerusalem," she stated.

She also spoke on the issue during an address to the National Press Club on Wednesday, stating that "there is no new policy".

The Guardian has also reported on the resolution to be considered by the Organisation of Islamic Cooperation tomorrow. It reads: "The (Council of Foreign Ministers) condemns all the positions that affect the legal status of the occupied Palestinian territory, including the city of Jerusalem.

"In this context, The Council of Foreign Ministers condemns the direction of the Australian government not to describe the city of East Jerusalem as 'occupied', and confirms (the Council) that this policy is in clear violations of international law, including the Fourth Geneva Convention, and the relevant United Nations resolutions, especially the UN Security Council resolutions.

"The Council calls the Government of Australia to respect its obligations under international law in this regard, and demands (the Council) Member States to follow up such illegal stands, and take actions necessary to respond to these illegal positions."

Jordan ambassador expresses 'deep concerns'

Jordan's ambassador Rima Ahmad Alaadeen said the delegation expressed their "deep concerns".

Ambassador Alaadeen described East Jerusalem as a "very raw nerve" for the world's 1.5 billion Muslims, who see the city as the capital of a future sovereign Palestinian state.