Treasurer Josh Frydenberg has defended the government's decision to recognise West Jerusalem as Israel's capital, as Jewish and Arab leaders were critical of the move.
Arab nation representatives are set to meet in Cairo on Tuesday to discuss how strongly to condemn the decision, announced by Prime Minister Scott Morrison on the weekend.
Tzachi Hanegbi, Israel's minister for regional co-operation, described the move as "a mistake" which needs to be fixed.
"Jerusalem is one whole, united," he said.
The Malaysian foreign ministry described it as "premature and a humiliation to the Palestinians and their struggle for the right to self-determination".
However, Mr Frydenberg told Sky News on Monday the decision followed a "carefully considered process".
"What we've announced is consistent with our long-standing position which is to support a two-state solution," he said.
"We support Israel's right to exist behind secure recognised borders and to also recognise the Palestinians' right to their own independent homeland."
He said the Australian embassy would stay in Tel Aviv, while a trade and defence office would be set up in West Jerusalem.
"Our position is we support's Israel's capital in West Jerusalem but at the same time we recognise the Palestinians and their future capital would be in East Jerusalem."
