He said in a speech that Australia will recognize east Jerusalem as Palestine's capital only after a settlement has been reached on a two-state solution. The Australian Embassy won't be moved from Tel Aviv until such a time, he said.

While the embassy move is delayed, Morrison said his government will establish a defense and trade office in Jerusalem and will also start looking for an appropriate site for the embassy.

"The Australian government has decided that Australia now recognizes west Jerusalem, as the seat of the Knesset and many of the institutions of government, is the capital of Israel," Morrison said. He said the decision respects both a commitment to a two-state solution and longstanding respect for relevant U.N. Security Council resolutions.

Morrison had earlier floated the idea that Australia may follow the contentious U.S. move of relocating its embassy to Jerusalem from Tel Aviv, but it was seen by many Australians as a political stunt. Critics called it a cynical attempt to win votes in a by-election in October for a Sydney seat with a high Jewish population.

The consideration had sparked backlash from Muslim-majority Indonesia and Malaysia, threatening a free trade deal which has now been delayed.

Opposition leader Bill Shorten said Saturday that the decision to recognize west Jerusalem as Israel's capital but not move the embassy there was a "humiliating backdown" from the October by-election campaign.

"What I'm worried is that Mr. Morrison put his political interest ahead of our national interest," Shorten told reporters.

Israel captured east Jerusalem in the 1967 Mideast war and annexed it in a move that is not internationally recognized. Israel considers east Jerusalem an indivisible part of its capital, while the Palestinians seek the area, home to the city's most sensitive holy sites, as the capital of a future state.