A couple of religious Jews pray at the Jewish cemetary of Mount of Olives in Jerusalem on Dec 14, 2018. (AHMAD GHARABLI / AFP)

SYDNEY — Australia has decided to formally recognize west Jerusalem as Israel's capital, but won't move its embassy until there's a peace settlement between Israel and Palestinians, Prime Minister Scott Morrison announced Saturday.

He said in a speech that Australia will recognize east Jerusalem as Palestine's capital only after a settlement has been reached on a two-state solution. The Australian Embassy won't be moved from Tel Aviv until such a time, he said.

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

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

"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," Morrison said.

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

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Morrison had earlier floated the idea that Australia may follow the contentious US move of relocating its embassy to Jerusalem from Tel Aviv, but it was seen by many Australians as a political stunt. Critics called it a cynical attempt to win votes in a by-election in October for a Sydney seat with a high Jewish population.

The consideration had sparked backlash from Muslim-majority Indonesia and Malaysia, threatening a free trade deal which has now been delayed.

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

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