Prime Minister Scott Morrison says Canberra is committed to recognising a future state of Palestine with East Jerusalem as its capital when the occupied city's status is determined in a peace deal.
Australia now recognises West Jerusalem as Israel's capital, Prime Minister Scott Morrison said on Saturday, but a contentious embassy shift to the occupied city from Tel Aviv will not occur until a peace settlement is achieved.
Morrison also committed to recognising a future state of Palestine with east Jerusalem as its capital when the city's status is determined in a peace deal.
"Australia now recognises West Jerusalem –– being the seat of the Knesset and many of the institutions of government –– is the capital of Israel," Morrison said in a speech in Sydney.
"And we look forward to moving our embassy to West Jerusalem when practical, in support of and after final status of determination," he said, adding that work on a new site for the embassy was under way.
The controversial announcement by Morrison that his government follows US President Donald Trump's lead and recognises the occupied city as Israel's capital.
Both Israel and the Palestinians claim entire Jerusalem as their capital.
Australia on Friday also warned citizens to take care while travelling in neighbouring Muslim-majority Indonesia, ahead of an expected but contentious move to recognise Jerusalem as Israel's capital.
Scores of Australians preparing to jet off to Bali and other tropical island destinations for upcoming summer holidays should "exercise a high degree of caution", the Department of Foreign Affairs warned.
Both Israel and the Palestinians claim Jerusalem as their capital. Critics say declaring Jerusalem the capital of either inflames tensions and prejudges the outcome of final status peace talks.
Trump's decision to move the US embassy from Tel Aviv last May prompted tens of thousands of Palestinians to approach the heavily-protected Israeli border. At least 62 Palestinians were killed by Israeli fire that day.
Morrison is expected to stop short of actually shifting Australia's diplomatic corps to the Holy City, amid warnings from his own officials about the cost and security implications.
But by recognising West Jerusalem as the Israeli capital could help the embattled Australian PM - who faces the prospect of an election drubbing next year - with Jewish and conservative Christian voters and win him friends in the White House.
His supporters argue Israel has the right to choose its own capital and peace talks are dead in the water, so there is no peace to prejudge.
But the move still risks heightening unrest, both in Australia's immediate neighbour Indonesia - the world's most populous Muslim nation - and further afield.
The Palestinian government would press for Arab and Muslim states to "withdraw their Ambassadors" and take some "meat and wheat" style "economic boycott measures" if the move went ahead, Palestinian ambassador to Australia Izzat Abdulhadi told AFP.
Indonesia's government, facing domestic pressure at home, reacted angrily earlier this year, when Morrison floated the idea of both recognising Jerusalem and moving the Australian embassy there.
The issue has put the conclusion of a bilateral trade agreement on hold.
In the meantime, Australia's foreign ministry has moved to prepare the ground.
"Demonstrations have been held in recent weeks around the Australian Embassy in Jakarta and the Australian Consulate-General in Surabaya," it warned in a public notice Friday.
"Protests may continue at the Embassy in Jakarta or at any of Australia's Consulates-General in Surabaya, Bali and Makassar," the Department of Foreign Affairs said."Exercise a high degree of caution."
Tensions are currently running high between Israel and the Palestinians.
At least 235 Palestinians have been killed during demonstrations across Gaza-Israel fence.