DONALD Trump has announced that the US now recognises Jerusalem as the capital of Israel, in a move that upends decades of US policy.
The US president said in a White House speech that he is "determined that it is time to officially recognise Jerusalem as the capital of Israel".
He said he has deemed this change to be in America's interests.
Mr Trump said the decision "marks the beginning of a new approach to conflict between Israel and the Palestinians".
World leaders have warned that the move could inflame tensions in the volatile Middle East.
Mr Trump also said he is directing the State Department to begin preparations to move the US Embassy in Israel from Tel Aviv to Jerusalem.
He said the move would allow the department to begin hiring architects and making other plans, adding that it was "a recognition of reality".
Israel's Prime Minister Benjamin Netanyahu said in a statement that Israel is "profoundly grateful", adding that Mr Trump's announcement marks a "historic day" and is an "important step towards peace".
He said his country "will continue to work with the president and his team to make that dream of peace come true".
Meanwhile, the head of the Islamic militant group Hamas accused Mr Trump of disregarding Palestinian feelings with his move.
Ismail Haniyeh said in a statement that the Palestinian people "know how to respond properly to the disregard of their feelings and sanctuaries".
He said the decision "will not change the facts of history and geography".
Hamas, which controls the Gaza Strip, is considered a terrorist group by Israel, the US and other Western allies.
UN Secretary-General Antonio Guterres also spoke out against what he said are "unilateral measures" that jeopardise the prospect for peace for Israelis and Palestinians.
The US has never previously endorsed the Jewish state's claim of sovereignty over any part of Jerusalem, insisting its status must be resolved through Israeli-Palestinian negotiation.
Ahead of the decision, a spokesman for Palestinian President Mahmoud Abbas warned it would have "dangerous consequences".
Pope Francis also called for the status quo of Jerusalem to be respected and for "wisdom and prudence" to prevail to avoid further conflict.
Francis made the appeal during his weekly audience, hours before Mr Trump's announcement.
The pope said he was "profoundly concerned" about recent developments concerning Jerusalem, and declared the city a unique and sacred place for Christians, Jews and Muslims that has a "special vocation for peace".
He appealed "that everyone respects the status quo of the city", according to UN resolutions.
"I pray to the Lord that its identity is preserved and strengthened for the benefit of the Holy Land, the Middle East and the whole world and that wisdom and prudence prevail to prevent new elements of tension from being added to a global context already convulsed by so many cruel conflicts," he said.
The Vatican has long sought an internationally guaranteed status for Jerusalem that safeguards its sacred character for Jews, Muslims and Christians.
Pope Francis spoke by telephone on Tuesday with Mr Abbas.
Meanwhile, Prime Minister Theresa May said Britain would not alter its position that Jerusalem should eventually form a shared capital for Israelis and Palestinians under a two-state solution.
Asked at Prime Minister's Questions whether she had been consulted on the move by the US president, Mrs May said: "I'm intending to speak to President Trump about this matter. But, our position has not changed.
