Australia has decided to formally recognise west Jerusalem as Israel’s capital, but will not move its embassy until there is a peace settlement between Israel and Palestinians, Prime Minister Scott Morrison announced.

He said Australia will recognise east Jerusalem as Palestine’s capital only after a settlement has been reached on a two-state solution.

The Australian Embassy will not be moved from Tel Aviv until such a time.

While the embassy move is delayed, Mr Morrison said the government will establish a defence and trade office in Jerusalem and will also start looking for an appropriate site for the embassy.

He said in a speech Saturday: “The Australian government has decided that Australia now recognises west Jerusalem, as the seat of the Knesset and many of the institutions of government, is the capital of Israel.”

He said the decision respects both a commitment to a two-state solution and longstanding respect for relevant UN Security Council resolutions.

Israel captured east Jerusalem in the 1967 Mideast war and annexed it in a move that is not internationally recognised.

Israel considers east Jerusalem an indivisible part of its capital, while the Palestinians seek the area, home to the city’s most sensitive holy sites, as the capital of a future state.