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.

Morrison also committed to recognising the aspirations for a future state of Palestine with East Jerusalem as its capital when the city's status is determined in a peace deal, AFP said.

The prime minister said it was in Australia's interests to support "liberal democracy" in the Middle East and took aim at the United Nations, which he said was a place Israel is "bullied".

"We look forward to moving our embassy to West Jerusalem when practical ... and after final status determination," he told reporters in Sydney, according to Reuters.

Morrison said in October he was open to shifting the embassy.

President Donald Trump's decision to move the US embassy to Jerusalem from Tel Aviv in May delighted Israel, infuriated Palestinians and upset the wider Arab world and Western allies.

The Australia Palestine Advocacy Network said it was dismayed by the prime minister's plan, which it argued would damage the peace process, Australian Broadcasting Corporation (ABC) said.

"It serves no Australian interest, will weaken our trade and security relations with regional partners, and may irreparably injure our international reputation by aligning Australia with the Trump and Netanyahu governments against an overwhelming international consensus regarding the status of Jerusalem," APAN's president Bishop George Browning was cited by ABC as saying.