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Canberra: Australia will recognise West Jerusalem as the capital of Israel, Prime Minister Scott Morrison announced on Saturday.
Morrison made the foreign policy shift almost two months after he declared that he was "open" to the idea, reports Xinhua news agency.
However, the Prime Minister also announced his support for recognising a Palestinian state with East Jerusalem as its capital in the future.
The Australian embassy will remain in Tel Aviv until the status of Jerusalem is determined under a peace deal between Israel and Palestine.
The decision was made despite international pressure, most notably from Indonesia, to maintain the status quo.
"Foreign policy must speak of our character and our values. What we stand for. What we believe in and, if need be, what we'll defend," Morrison said in a speech on Saturday.
"The Australian government has decided that Australia now recognizes West Jerusalem, as the seat of the Knesset and many of the institutions of government, is the capital of Israel.
"And we look forward to moving our embassy to West Jerusalem when practical, in support of, and after, final-status determination.
"Furthermore, recognizing our commitment to a two-state solution, the Australian government has also resolved to acknowledge the aspirations of the Palestinian people for a future state with its capital in East Jerusalem."
The announcement comes almost exactly one year after US President Donald Trump announced the American recognition of Jerusalem as the capital of Israel.
Indonesian President Joko Widodo has warned that recognizing Jerusalem could jeopardise Australia's relationship with his country, which has the largest Islamic population in the world.
Reports surfaced in November that moving the embassy could threaten Australia's pending free trade agreement with Indonesia but senior members of the government have repeatedly dismissed the idea.
In addition to announcing his Israel decision, Morrison also declared that Australia would retain support for the Iran nuclear deal.
