Under the new plan, Jerusalem will remain as the capital of Israel, and the United States will recognise Israeli settlements in the occupied West Bank.
In other words, Israel keeps the vast majority of Jerusalem as its sovereign capital, and Palestinians get no right of return.
Instead, a future state of Palestine would get a few neighbourhoods in far eastern Jerusalem.
The 1948 war saw 700,000 Palestinians uprooted from their homes, creating a still-ongoing refugee crisis.
I will always stand with the State of Israel and the Jewish people. I strongly support their safety and security and their right to live within their historical homeland. It's time for peace! pic.twitter.com/lKwQ9IKTUG
Today there are more than seven million Palestinian refugees, but Israelis refuse to consider including their right to return in any final status deal. Trump's new plan essentially supports this.
His proposal also redraws the borders to basically give Israel more land in the West Bank, a relatively tiny part of land occupied by Palestine.
He also promised heavy international economic investment in Palestinian-administered areas, claiming the plan would create a million new Palestinian jobs, halve poverty and could triple the state's GDP over the next decade.
This is based on the hope that wealthy Arab nations contribute to a prospective $US50 billion purse to fuel construction and economic growth in the West Bank and Gaza Strip.
Fury among Palestians
Palestinians have widely rejected the proposal.
No Palestinian officials attended the announcement, with the territory's leaders deeming the plan too favourable to Israel. President Mahmoud Abbas said it "belongs to the dustbin of history".
Protests broke out across Palestinian territories in the immediate wake of Trump's plan.
Critics say both Trump and Israeli leader Netanyahu want to keep attention away from their own countries' troubles.
Palestine supporters gather outside the American Embassy. Photo / AP
Trump is currently on trial in the US Senate on impeachment charges, while Netanyahu was indicted on corruption charges in November. Both have denied wrongdoing.
They also face re-election campaigns – Netanyahu in March and Trump in November.
Mustafa Barghouti, secretary-general of the Palestinian National Initiative, said the proposed deal is "disastrous" to Palestinians.
"Trump's deal is clearly an attempt to legitimatize the illegal measures Israel has already implemented in the Palestinian territories, for the obvious objective of annihilating any possibility for the establishment of a free and independent Palestinian state," he wrote for CNN. "It gives the Israeli military absolute domination over economic, social and security matters all throughout the occupied territories."
He said Palestinians believe the Trump administration's actions are "blatant attempts to dispose of their national rights once and for all".
"President Trump has done much damage with his supposed peace deal, not only to Palestinians, but also to the Israeli people who cannot possibly be proud of having established an apartheid system in the 21st century."
The President is currently on trial in the US Senate on impeachment charges. Photo / AP
What did Israel say?
Speaking after Trump in Washington, Netanyahu described the announcement as "a historic day."
He compared the plan to former president Harry Truman's 1948 recognition of the state of Israel.
"On this day, you became the first world leader to recognise Israel's sovereignty over areas in Judea and Samaria that are vital to our security and central to our heritage," he added, using the Biblical names for the West Bank.
Backlash from world leaders
Turkish President Recep Tayyip Erdogan insisted Jerusalem was "not for sale" in response to a Middle East plan unveiled by US counterpart Donald Trump.
"They say, 'the deal of the century', what deal? This is a project of occupation," Erdogan said in Ankara. "Jerusalem is our red line … Jerusalem is not for sale.
Secretary-general of the Palestinian National Initiative, says the proposed deal is "disastrous" to Palestinians. Photo / AP
"No one should attempt to shamelessly say 'we'll give something and you leave this to us'," he added.
The plan was also slammed by former president Jimmy Carter, who said it would violate international law and urged the United Nations to stop Israel from annexing Palestinian land.
"The new US plan undercuts prospects for a just peace between Israelis and Palestinians," the former US leader said in a statement.
"If implemented, the plan will doom the only viable solution to this long-running conflict, the two-state solution."
He urged UN member-states "to adhere to UN Security Council resolutions and to reject any unilateral Israeli implementation of the proposal by grabbing more Palestinian land".
Iran blasted the plan, with a foreign ministry statement reading: "The shameful peace plan imposed by America on the Palestinians is the treason of the century and doomed to fail."
Qatar said it "welcomes all efforts aiming towards a longstanding and just peace" with Palestine, but warned that was unattainable without giving Palestinians more concessions.
