Paraguay has reversed a decision to move its embassy from Tel Aviv to Jerusalem after just three months, prompting anger from Israel which responded by shuttering its embassy in Asunción and recalling its ambassador.

The South American country announced in May that it would follow Donald Trump’s lead by relocating the mission to the holy city, all of which Israel claims as its capital even as Palestinians and most world powers argue its status remains under dispute.

Former president Horacio Cartes personally inaugurated the new diplomatic site. The Israeli prime minister, Benjamin Netanyahu, said at the time that Paraguay, the third country after the United States and Guatemala to make the move, had taken a “bold stance in international affairs”.

However, Paraguay’s new president, Mario Abdo Benítez, who took office last month, reviewed the choice and his foreign minister told reporters on Wednesday that the decision had been changed.

“Paraguay wants to contribute to an intensification of regional diplomatic efforts to achieve a broad, fair and lasting peace in the Middle East,” Luis Alberto Castiglioni said.

Shortly after, Netanyahu’s office responded by saying it will close its Paraguay embassy and recall its ambassador for consultations. “Israel views with great severity the unusual decision by Paraguay that will strain the ties between the countries,” a brief statement said.

The Palestinian president, Mahmoud Abbas, had previously called for Latin American countries not to move their embassies. His foreign minister, Riyad al-Maliki, pushed the freshly installed Paraguay administration to reverse its decision, according to a statement from his office which announced “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 ministry said.

Trump’s decision broke decades of international consensus that recognition for one side or the other would kill already-moribund efforts at achieving a deal. Jerusalem has been a fundamental issue that has stalled previous negotiations, but Trump has said it is now “off the table”.

Diplomats had warned that the December announcement could see a return to violence in the region. On the day Washington’s embassy was opened in Jerusalem – attended by Trump’s daughter, Ivanka, and her husband, Jared Kushner – Israeli forces shot and killed 58 Palestinians protesting against the event.

Reuters contributed to this report