Australian Prime Minister Scott Morrison said on Monday that he was considering transferring his country's embassy to Jerusalem and recognizing the holy city as Israel's capital during a phone call with his Israeli counterpart.
Israeli Prime Minister Benjamin Netanyahu issued a statement saying he had discussed the possible embassy move with Morrison.
"We're committed to a two-state solution, but frankly, it hasn't been going that well, not a lot of progress has been made, and you don't keep doing the same thing and expect different results", Morrison said Tuesday morning, speaking from Parliament House.
Australia would be "violating worldwide law" and United Nations security council resolutions if it proceeded with the embassy move, said Palestinian foreign minister Riyad al-Maliki, who was in Jakarta on an official visit Tuesday.
"The Australian prime minister updated [Netanyahu] that he is weighing whether to formally recognize Jerusalem as Israel's capital and move the Australian Embassy to Jerusalem".
It also quoted him as saying that former Australian ambassador to Israel Dave Sharma had made a strong case that the move would not compromise the eventual creation of a Palestinian state, which Australia supports. "Prime Minister Netanyahu thanked him", a statement from the Netanyahu's office said.
Mr Morrison has also announced the government would review Australia's support for the Iran nuclear deal to see whether it was still "fit for purpose" in preventing the country from acquiring nuclear weapons after Mr Trump withdrew the United States from the Obama-era deal.
He said he was "open-minded" to proposals to recognize Jerusalem and move Australia's embassy, which he described as "sensible" and "persuasive", though if followed through would spell a sharp break from the policy of successive Australian governments for decades.
The opposition center-left Labor Party said the announcement was a desperate attempt to win the by-election in the Wentworth electorate. Elections are slated to be held this weekend in a tight race that could rob Morrison of a majority in parliament.
"The people of Wentworth, and all Australians, deserve a leader who puts the national interest ahead of his self-interest, and governs in the best long-term interest of the nation", she added.
Israel regards all of the city - including the eastern sector it annexed after the 1967 Middle East war - as its capital while the Palestinians, with broad global backing, want East Jerusalem as the capital of a future state they hope to establish in the occupied West Bank and the Gaza Strip.
In a strongly-worded statement, Izzar Abdulhadi warned that the embassy relocation would "make Australia a pariah state" and damage "Australia's worldwide standing and. relations with Arab and Muslim-dominated countries".
Ambassadors from 13 Arab countries met in Canberra on Tuesday and agreed to send a letter to Australia's foreign minister expressing their concern, Egyptian ambassador to Australia Mohamed Khairat said. "We do so in our own national interests consistent with our own beliefs and our own values".