Australia said it would no longer recognise west Jerusalem as Israel's capital Tuesday, a policy reversal that prompted a curt rebuke from the Jewish state.

Foreign Minister Penny Wong said the city's status should be decided by Israeli-Palestinian peace talks, unwinding a contentious decision by the previous conservative government.

In 2018, Australia's then-Prime Minister Scott Morrison followed US president Donald Trump's lead in unilaterally recognising west Jerusalem as the Israeli capital.

The move caused a domestic backlash in Australia and friction with neighbouring Indonesia - the world's most populous Muslim-majority nation - temporarily derailing a bilateral free trade deal.

"I know this has caused conflict and distress in part of the Australian community, and today the government seeks to resolve that," Wong said.

Jerusalem is claimed by both Israelis and Palestinians, but most governments avoid putting embassies there to avoid prejudging the outcome of a final peace agreement.

"We will not support an approach that undermines" a two-state solution, Wong said, adding: "Australia's embassy has always been, and remains, in Tel Aviv."

Photo: AFP

Israeli Prime Minister Yair Lapid criticised Tuesday's move - which comes as he prepares to face November 1 elections.

"We can only hope that the Australian government manages other matters more seriously and professionally," he said.

Israel annexed east Jerusalem following the 1967 Six Day War, and has declared the entire city as its "eternal and indivisible capital".

Palestinians claim the eastern part as the capital of a future state.

Photo: AFP

Palestinian Authority's civil affairs minister, Hussein al-Sheikh welcomed the move by Canberra as an "affirmation" that Jerusalem's status depends on a final status talks.

Indonesia also welcomed the decision. 

"This policy would hopefully contribute positively to Palestinian-Israeli peace negotiations," the foreign ministry in Jakarta said.

Steadfast friend

Wong insisted that the decision - which has limited practical impact - did not signal any broader shift in policy or hostility towards Israel.

"Australia will always be a steadfast friend of Israel. We were amongst the first countries to formally recognise Israel," she said.

"We will not waver in our support of Israel and the Jewish community in Australia. We are equally unwavering in our support of the Palestinian people, including humanitarian support."

The centre-left Labor party, with Anthony Albanese as prime minister and Wong as foreign minister, came to power in May 2022 after strongly opposing the previous government's Jerusalem policy.

Wong accused the Morrison government of making the Jerusalem decision to influence a by-election in a Sydney suburb with a sizable Jewish community.

"You know what this was? This was a cynical play, unsuccessful, to win the seat of Wentworth and a by-election," she said.

Symbolism

Canberra's shift was foreshadowed by the removal of language about the Israeli capital on the website of Australia's Department of Foreign Affairs and Trade.

Although Australia is not a major player in peace talks, Ran Porat, a historian and researcher at Melbourne's Monash University, said the move was significant.

"In the Middle East in general symbolism is very much at the centre of many conflicts. Symbolism is not negligible, it's not unimportant."

Porat added that the move could be seized on by Israel's opposition Likud, led by Benjamin Netanyahu, as evidence of the government's failings ahead of the general election.