Australia recognising Jerusalem as the capital of Israel, would "increase religious war in the area", according to the head of the Palestinian delegation in Canberra.

Mr Izzat Abdulhadi said if that decision was made, it would be "a recipe for damaging and destroying the peace process in the Middle East."

This weekend, Prime Minister Scott Morrison is expected to announce whether or not Australia's embassy in Israel will be moved from Tel Aviv to the contested capital.

The head of the Palestinian delegation in Canberra, Izzat Abdulhadi, has said if Australia recognises Jerusalem as the Israeli capital, it could raise the threat of religious war in the Middle East. (AAP)

There's been speculation one option is to keep the embassy where it is, but recognise Jerusalem as the capital.

Mr Abdulhadi told 9News he believed that would be just as bad a decision, as shifting the embassy.

He's warned Arab nations are also prepared to withdraw Ambassadors, and may consider economic sanctions.

"Our reaction will be difficult," he said.

Prime Minister Scott Morrison is expected to make a decision about whether the Australian embassy in Israel will move to Jerusalem, effectively recognising the contested city as the country's capital. (AAP)

"We will ask Arab governments to take difficult actions against Australia.

"We will talk to Saudis, Gulf States, and also OIC countries to boycott meat and wheat from Australia."

Mr Abdulhadi says he's spoken not only with his Foreign Minister in recent days, but also Ambassadors from other Arab and Muslim-majority countries, including Indonesia.

"I can tell you there will be huge damage actually," he said.

Mr Abdulhadi said Palestine could react negatively towards Australia if Mr Morrison does move the embassy to Jerusalem, including an industry backlash. (AAP)

"Australia will lose its international standing as a 'fair-go' country, and a country that respects human rights.

"We will perceive Australia as a country that adopts a sort of double standard."

Under the 1980 Arab League Agreement, Arab nations can cut diplomatic ties with any nation that recognises Jerusalem as the capital of Israel.

And Mr Abdulhadi told 9News Palestine is prepared to "be difficult" and will "go further" than it did with the United States, "because the US is a superpower".

Mr Morrison has repeatedly said he is in favour of a two-state solution, but Mr Abdulhadi says they are "nice words" but "he will be against this if he recognises Jerusalem as the capital of Israel."

A diplomatic representative from another Islamic nation issued another strong warning, telling 9News "Australia should remember once you make this decision you cannot go back."