Australia has decided to formally recognise West Jerusalem as the capital of Israel, but will not move its embassy from Tel Aviv until a peace settlement is achieved.

Prime minister Scott Morrison said his nation would also recognise a future state of Palestine with East Jerusalem as its capital, but only after a deal has been reached on a two-state solution.

Both Israel and the Palestinians claim Jerusalem as their capital.

"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.

"We look forward to moving our embassy to West Jerusalem when practical."


The opposition Labor party criticised Mr Morrison for putting "self-interest ahead of the national interest".

"Recognising West Jerusalem as Israel's capital, while continuing to locate Australia's embassy in Tel Aviv, is nothing more than a face-saving exercise," shadow minister for foreign affairs Penny Wong said in a statement.

"This is a decision which is all risk and no gain," she said, adding it puts Australia "out of step" with the international community.

In an unexpected announcement in October, Mr Morrison said he was open to moving Australia's embassy from Tel Aviv.

The shift in policy was viewed cynically because it came days before a crucial by-election in an electorate with a strong Jewish representation, a poll Mr Morrison's party subsequently lost.

Australia became one of just a few governments around the world to follow US President Donald Trump's lead and recognise the contested city as Israel's capital.

After Mr Trump moved the US embassy from Tel Aviv to Jerusalem in May, tens of thousands of Palestinians protested near the heavily-protected Israeli border. At least 62 Palestinians were killed by Israeli fire.

The move also drew criticism from Muslim-majority neighbours such as Indonesia and Malaysia, threatening a free trade deal which has now been delayed.

Israel captured East Jerusalem in the 1967 Mideast war and annexed it in a move that is not internationally recognised.

Israel considers East Jerusalem an indivisible part of its capital, while the Palestinians seek the area, home to the city's most sensitive holy sites, as the capital of a future state.