The Morrison government is cautiously optimistic its decision regarding Australia's Israeli embassy will not jeopardise the signing of the free trade agreement with Indonesia.

It is understood that cabinet on Tuesday agreed Australia would recognise Jerusalem as the capital of Israel but there will be no immediate move to shift the embassy from its current location in Tel Aviv.

One report cited cost of between $200 million and $400 million as the reason for leaving the embassy in Tel Aviv. Other options examined included establishing a consulate in Jerusalem.

Scott Morrison says joining the US in recognising Jerusalem will help achieve a two-state solution. Alex Ellinghausen

Prime Minister Scott Morrison is expected to announce the decision later this week.

Mr Morrison argues that joining the United States in recognising Jerusalem will help achieve a two-state solution. He announced a review into moving the embassy in the dying days of the byelection campaign for Wentworth, which has a large Jewish population.