SYDNEY (Reuters) - Australia formally recognises West Jerusalem as Israel's capital, reversing decades of Middle East policy, but will not move its embassy there immediately, Prime Minister Scott Morrison said on Saturday.
"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.
"We look forward to moving our embassy to West Jerusalem when practical," he told reporters in Sydney.
Morrison said in October he was open to shifting Australia's embassy from Tel Aviv. President Donald Trump's decision to move the U.S. embassy to Jerusalem from Tel Aviv in May delighted Israel, infuriated Palestinians and upset the wider Arab world and Western allies.
Morrison's unexpected announcement in October was viewed cynically because it came days before a crucial by-election in an electorate with a strong Jewish representation, a poll his party subsequently lost.
It also drew criticism from Muslim-majority neighbours such as Indonesia and Malaysia, neither of whom formally recognise Israel's right to exist. Arab countries worried that the move would unnecessarily inflame tensions in the Middle East.
Israel regards all of Jerusalem as its capital, including the eastern sector that it annexed after the 1967 Middle East war, and wants all embassies based there. The international community believes Jerusalem's status should be resolved through negotiation.
The status of Jerusalem, home to sites holy to the Muslim, Jewish and Christian faiths, is one of the biggest obstacles to a peace agreement between Israel and Palestinians who want East Jerusalem recognised as the capital of a Palestinian state.
Morrison said Australia would not move its embassy to West Jerusalem until the city's final status was determined, but said trade and defence offices would be opened there.
He confirmed Australia's support for a two-state solution with a Palestinian capital in East Jerusalem.
Izzat Salah Abdulhadi, head of the Palestinian Delegation to Australia, said endorsing two capitals signalled a genuine commitment to a two-state solution but said Israel would still regard Jerusalem as its "eternal and undivided capital".
"Recognition of any part of it before serious compromises and genuine concessions have been made will be seen, at least to some extent, as rewarding this intransigence," he said in a statement emailed to Reuters.
Indonesia's foreign ministry spokesman, Arrmanatha Nasir, noted that Australia had not moved its embassy to Jerusalem and called on all members of the United Nations to recognise a Palestinian state "based on the principle of two-state solutions".
(Reporting by Tom Westbrook; Additional reporting by Alison Bevege and Tabita Diela; Editing by Paul Tait)