Despite warnings of triggering further unrest in the Middle East, the US President has gone ahead and recognised Jerusalem as the Israeli capital.
Donald Trump says his team will begin the process of moving the US Embassy in Tel Aviv to Jerusalem.
"It would be folly to assume that repeating the exact same formula would now produce a different or better result," he announced.
"Therefore I have determined that it is time to officially recognise Jerusalem as the capital of Israel.
"While previous presidents have made this a major campaign promise, they failed to deliver. Today I am delivering.
"I've judged this course of action to be in the best interests of the United States of America and the pursuit of peace between Israel and the Palestinians.
Trump is fulfilling a pledge he made during the election campaign in 2016.
Monumental shift in US policy
The announcement is a massive reversal of decades of U.S policy.
A law passed in 1995 requires the US to move its embassy to Jerusalem but Presidents Clinton, Bush and Obama always put off that decision because of concern about inflaming tensions.
The status of Jerusalem is one of the thorniest issues between Israel and the Palestinians.
There has been a furious reaction from Palestinians and from many who see the move as likely to inflame tensions in the Middle East.
Trump insisted, however, that his decision is a long overdue step to advance the peace process.
"It was 70 years ago that the US recognised the State of Israel. Ever since then Israel has made its capital in the city of Jerusalem," he said.
"There will of course be disagreement and dissent regarding this announcement, but we are confident that ultimately, as we work through these disagreements, we will arrive at a place of greater understanding and cooperation."
Trump also recognised that specific boundaries of Israeli sovereignty in Jerusalem are subject to final status talks.
He announced that he had ordered the State Department to develop a plan to relocate the US embassy from Tel Aviv to Jerusalem, which experts say could take several years to complete.
At the end of his speech Trump was seen signing a waiver that delayed the embassy move for six months.
World leaders quick to react to decision
Israeli Prime Minister Benjamin Netanyahu welcomed the move as "historic".
He urged other countries to follow suit by moving their embassies in Israel to Jerusalem.
But other heads of state have come out against Trump's decision, including the German Chancellor Angela Merkel.
French President Emmanuel Macron Tweeted: "On Jerusalem, France does not approve of the US decision. France supports the solution of two states, Israel and Palestine, living in peace and security, with Jerusalem as the capital of the two states."
President of the Palestinian Authority, Mahmoud Abbas, condemned Trump's recognition of Jerusalem as Israel's capital.
He said Trump "has destroyed his credibility as a Mideast peace broker" and that his decision was a "declaration of withdrawal from the role it has played in the peace process".
Abbas said the Palestinian leadership will meet in the coming days and consult with Arab leaders to formulate a response.
The Palestinians claim east Jerusalem as their capital.
The European Union expressed "serious concern" over Trump's decision and the impact it will have.
Egypt's foreign ministry denounced Trump's decision, calling it a "violation of international resolutions on the city's status".
The statement also said Egypt was extremely worried about the impact the US decision could have on the region's "stability" and "its extremely negative impact" on the Israeli-Palestinian peace process.