"I am delivering. I've judged this course of action to be in the best interests of the United States of America and the pursuit of peace between Israel and the Palestinians," Mr Trump said.
"After more than two decades of waivers, we are no closer to a lasting peace agreement between Israel and the Palestinians.
"It would be folly to assume that repeating the exact same formula would now produce a different or better result."
The President said Israel had the right to determine its own capital "like every other sovereign nation".
"Acknowledging this as a fact is a necessary condition for achieving peace," he said.
Mr Trump said Jerusalem was the "seat of the modern Israeli government" and was home to the parliament, supreme court and prime minister.
The President has directed the State Department to begin the process of building a new US embassy in Jerusalem that would be "a magnificent tribute to peace". The process of moving the embassy out of Tel Aviv is expected to take years.
While the change is likely to be seen in the Muslim world as the US siding with the Israelis, Mr Trump said it was not intended to reflect on other ongoing disagreements with the Palestinians.
"We are not taking a position of any final status issues, including the specific boundaries of the Israeli sovereignty in Jerusalem or the resolution of contested borders," Mr Trump said.
He reiterated his administration's commitment to facilitating a "lasting peace agreement" and indicated support for a two-state solution, if both Israel and Palestine agreed.
Talk of the change received a swift rebuke from Palestinian factions, who called for "three days of rage" throughout the Muslim world, according to The Jerusalem Post.
There are fears the protests will turn violent, but Mr Trump called for calm.
"There will of course be disagreement and dissent regarding this announcement but we are confident that ultimately as we work through these disagreements, we will arrive at a peace and a place far greater in understanding and co-operation," he said.
"This sacred city should call forth the best in humanity, lifting our sights to what is possible, not pulling us back and down to the old fights that have become so totally predictable.
"Today, we call for calm, for moderation and for the voices of tolerance to prevail over the purveyors of hate.
"Our children should inherit our love, not our conflicts."
Mr Trump called for "young and moderate voices all across the Middle East" to resist the "bloodshed, ignorance and terror" that had held peace back.
The President explained that, when he came to office, he promised to approach the world's challenges "with open eyes and very fresh thinking".
"We cannot solve our problems by making the same failed assumptions, repeating the same failed strategies of the past," he said.
"Old challenges demand new approaches."
MOVE IS 'KISS OF DEATH' FOR PEACE
Palestine's chief representative in the UK, Manuel Hassassian, said the move had dashed hopes of a peace deal with Israel.
"If he says what he is intending to say about Jerusalem being the capital of Israel, it means a kiss of death to the two-state solution," he said on BBC radio.
"He is declaring war in the Middle East, he is declaring war against 1.5 billion Muslims [and] hundreds of millions of Christians that are not going to accept the holy shrines to be totally under the hegemony of Israel."
The move is controversial because Jerusalem shares sacred sites with Jewish, Islamic and Christian faiths. The decision could imply that Israel has sovereignty of East Jerusalem, which Palestinians seek as their capital under a two-state solution.
Mr Trump's decision breaks with seven-decades of policy in the volatile region.
The White House justified the policy change in a briefing with reporters yesterday by saying that the change acknowledged the "historical and current reality" that Jerusalem was the capital and the "seat of government" in the country.
Middle East politics expert Michael Dumper told news.com.au that moving the embassy was a "grave mistake" because it could re-energise Islamic radicalism, which had been weakened in recent years.
"Given the disarray amongst the Palestinian factions, the fragmentation of the Arab world and the fissures in the broader Islamic community, there is a 50-50 chance that the regional response to an embassy move will not be so overwhelming as may have been predicted several years ago," Professor Dumper said.
"Then, one could fairly safely predict the burning of US and Israeli flags in Istanbul, Cairo and other capitals of the region with possibly crowds of protesters attempting to storm US embassy premises.
"Today, one cannot be so certain.
"In terms of moving the remnants of the peace process forward, and of re-energising Islamic radicalism which has taken a big hit since the rise of [Egyptian President Abdel Fattah el-] Sisi and the demise of ISIS [Islamic State], moving the US Embassy to Jerusalem would still be a grave mistake.
"Nevertheless, President Trump may calculate that the political gains he obtains from pleasing the conservative, evangelical and pro-Israel elements of his domestic base will be greater than the losses for the US in the Middle East."
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