Australia recognises west Jerusalem as Israel's capital

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 has said.

Israel described the move as a step in the right direction. Palestinian chief negotiator Saeb Erekat said the announcement was born of Australian "petty domestic politics".

"Australia now recognises west Jerusalem, being the seat of the Knesset and many of the institutions of government, is the capital of Israel," Mr Morrison said.

"We look forward to moving our embassy to west Jerusalem when practical," he told reporters in Sydney.

Morrison also confirmed Australia's support for a two-state solution with a Palestinian capital in East Jerusalem. In October, Morrison said he was open to shifting Australia's embassy from Tel Aviv.