"We should call for and we should work on launching an intifada in the face of the Zionist enemy," Ismail Haniyeh said in a speech from Gaza on Thursday.
"This will not stop until the liberation of Jerusalem and the West Bank,” he said, calling on ordinary civilians to rise up.
Schools and shops across the Palestinian Territories were shuttered on Thursday in protest against the US' move.
"We have given instruction to all Hamas members and to all its wings to be fully ready for any new instructions or orders that may be given to confront this strategic danger that threatens Jerusalem and threatens Palestine," he said.
"United Jerusalem is Arab and Muslim, and it is the capital of the state of Palestine, all of Palestine," Mr Haniyeh added, referring to territory including Israel as well as the Hamas-controlled Gaza Strip and the Israeli-occupied West Bank.
Mr Haniyeh, who was elected as Hamas' leader earlier this year, also called on Palestinian Authority President Mahmoud Abbas to withdraw from the peace process.
He reiterated the militant group's call for a "day of rage" across the Palestinian Territories on Friday.
While Hamas made no mention of utilising its own arsenal to attack Israel, fears of violence in the volatile region are growing. More protests and strikes are expected on Friday - and the Muslim holy day is often a test for whether such demonstrations turn violent.
The Israeli military said it would deploy several battalions to the West Bank ahead of Friday. Other troops have been put on alert to address "possible developments".
A spokesperson for Hamas said on Wednesday night that Mr Trump had "opened the gates of hell" by taking the unprecedented step of calling the contested city Israeli.
Israel annexed east Jerusalem in the 1967 Six Day war, a move that was never internationally recognised. Israelis claim the entire city as their capital - as do Palestinians.
Control of it remains one of the core stumbling blocks to an Israeli-Palestinian peace deal.
Like many presidential hopefuls before him, on the campaign trail Mr Trump promised to recognised Jerusalem as Israel's capital and to relocate the US embassy there from Tel Aviv.
Over the last year, the new administration has delayed a decision on the issue.
Mr Trump's Wednesday announcement, however, upends decades of US policy: the current US position is to recognise the status of Jerusalem in a final peace agreement.
The move has been almost universally condemned by the international community - including a rare rebuke from key US ally Saudi Arabia.
Observers worry such a symbolic move could spark renewed violence in Israel and fan the flames of terrorism across the Muslim world, and risks showing the US is no longer interested in pursuing a two-state solution.
While Israeli Prime Minister Benjamin Netanyahu praised the decision as an "historic landmark", Palestinian Authority President Mahmoud Abbas said on Wednesday that the move signals a "withdrawal" from the peace process.
The US has been seeking to resurrect talks between Israel and the Palestinians since Mr Trump took office. The president has previously described brokering an end to the Arab-Israeli conflict "the ultimate deal".
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