The President also instructed his State Department to begin the three-year process of moving the American embassy from Tel Aviv to the holy city, calling the twin move "a step to advance the peace process" between Israel and the Palestinians.
While Israel's Benjamin Netanyahu praised Mr Trump's announcement as an "historic landmark", Palestinian President Mahmoud Abbas said that with the move, the US was making a "declaration of withdrawal" from its mediation role during the peace process.
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The leader of Hamas has now called for a new uprising against Israel in light of Mr Trump's decision.
"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. There have been clashes between police in occupied Gaza, the West Bank and parts of Jerusalem.
Mr Trump acted under a 1995 law that requires the United States to move its embassy to Jerusalem. His predecessors, Bill Clinton, George W Bush and Barack Obama, had consistently put off that decision to avoid inflaming tensions in the Middle East.
A Palestinian envoy said Mr Trump's decision was a declaration of war in the Middle East while Pope Francis called for Jerusalem's status quo to be respected, saying new tension would further inflame world conflicts.
China and Russia expressed concern that the plans could aggravate Middle East hostilities. The United States has never endorsed the Israel's claim of sovereignty over any part of Jerusalem and has insisted its status be resolved through Israeli-Palestinian negotiation.
Any US declaration on Jerusalem's status ahead of a peace deal "would harm peace negotiation process and escalate tension in the region," Saudi Arabia's King Salman told Mr Trump, according to a Saudi readout of their telephone conversation.
Declaring Jerusalem as Israel's capital, the King said, "would constitute a flagrant provocation to all Muslims, all over the world."
In his calls to Palestinian President Mahmoud Abbas and Jordan's King Abdullah II, Mr Trump delivered what appeared to be identical messages of intent.
Both leaders warned him moving the embassy would threaten peace efforts and security and stability in the Middle East and the world, according to statements from their offices.
Ahmed Aboul-Gheit, the head of the Arab League, urged the US to reconsider any recognition of Jerusalem as Israel's capital, warning of "repercussions."
Turkey's President, Recep Tayyip Erdogan, told his Parliament such recognition was a "red line" for Muslims and said Turkey could respond by cutting diplomatic ties with Israel.
The French President, Emmanuel Macron, said he reminded Mr Trump in a phone call that Jerusalem should be determined through negotiations on setting up an independent Palestine alongside Israel.
Meeting US Secretary of State Rex Tillerson in Brussels, EU foreign policy chief Federica Mogherini said actions undermining peace efforts "must be absolutely avoided."
Additional reporting by agencies
Hamas just called for a new intifadaThe IndependentThe leader of Hamas has called for a new uprising against Israel after US President Donald Trump's decision to recognise Jerusalem as the capital of Israel. "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. A spokesperson for the militant organisation previously said on Wednesday night that Mr Trump had "opened the gates of hell" by taking the unprecedented step of calling the contested city Israeli.
BREAKING: The Saudi royal court has condemned Trump's decision to recognise Jerusalem as Israel's capital as "irresponsible", according to the Associated Press.
Protests have erupted in Gaza over Trump's decision to recognise Jerusalem as Israel's capitalThe IndependentProtests have erupted across Gaza in response to Donald Trump's historic and hugely controversial declaration that Jerusalem is the capital of Israel. The announcement shattered decades of US foreign policy and triggered an angry response from Palestinians, who took to the streets burning flags and tires and chanting anti-American slogans.
Trump's Jerusalem move is a gamble with no obvious rewardThe IndependentAs with a number of things that have outraged many outside the White House, it all started with a campaign promise. President Donald Trump promised that he would move the US embassy from Tel Aviv to Jerusalem, and on Wednesday, nearing the end of his first year in office he finally followed through. Administration officials had refused to confirm the announcement until the day before Mr Trump took to the podium in the Diplomatic Reception Room of the White House, despite numerous reports.
Indonesia is the latest country to condemn Donald Trump's move. President Joko Widodo said: "Indonesia strongly condemns the United States' unilateral recognition of Jerusalem as the capital of Israel and asks the US to reconsider the decision."
"This can rock global security and stability."
"I and the people of Indonesia remain consistent in continuing to fight together with the Palestinian people for their independence and rights in accordance with the 1945 Mandate."
Zafar Mehdi, a freelance reporter, has shared the front page of Lebanese newspaper Al Akhbar.
Israeli prime minister Benjamin Netanyahu says his government is in talks with other countries over recognising Jerusalem as the nation's capital.
Iraq's foreign ministry has summoned the US ambassador in Baghdad to hand him a memo protesting Donald Trump’s decision to recognise Jerusalem as Israel's capital, Reuters reports
Udi Shaham, a reporter for The Jerusalem Post, has shared footage of a reported protest happening at the Damascus Gate, one of the main entrances to the Old City of Jerusalem.
Alistair Burt MP, a Foreign Office minister, is answering an urgent question in the Commons from shadow foreign secretary Emily Thornberry on Mr Trump's move.
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