Australia recognises west Jerusalem as Israel's capital
In the interim, the prime minister said, Australia would establish a defence and trade office in the west of the holy city.
"Furthermore, recognising our commitment to a two-state solution, the Australian government is also resolved to acknowledge the aspirations of the Palestinian people for a future state with its capital in east Jerusalem," he added.
The contentious embassy shift from Tel Aviv to Jerusalem will not occur until a peace settlement is achieved.
Morrison also committed to recognising a future state of Palestine with east Jerusalem as its capital.
"Australia now recognises west Jerusalem - being the seat of the Knesset and many of the institutions of government -is the capital of Israel," Morrison said in a speech in Sydney.
Both Israel and the Palestinians claim Jerusalem as their capital.
Countries have avoided moving their embassies there to prevent inflaming peace talks on the city's final status, until Trump unilaterally moved the US embassy there earlier this year. The move sparked angry protests in the Palestinian territories.
Morrison first floated the shift in foreign policy in October, the move angered Australia's immediate neighbour Indonesia -- the world's most populous Muslim nation.
The issue has put a halt on years-long negotiations on a bilateral trade deal.
Canberra on Friday told its citizens travelling to Indonesia to "exercise a high degree of caution", warning of protests in the capital Jakarta and popular holiday hotspots, including Bali.
Morrison pointed to Australia's military history in the region, and the country's interest in a "rules-based" order in the Middle East, to support the shift in foreign policy.
Morris vowed Australia would no longer abstain from UN resolutions he said "attacked" Israel, but would instead oppose them, including the "Jerusalem" resolution, which asks nations not to locate diplomatic missions to the holy city.
"The UN General Assembly is now the place where Israel is bullied and where anti-Semitism is cloaked in language about human rights," Morrison said.
Morrison first announced he was "open-minded" to an embassy shift to Jerusalem ahead of a crucial October by-election in a Sydney constituency with a sizeable Jewish population.
Israeli Prime Minister Benjamin Netanyahu at the time hailed the initiative, but Morrison faced mounting backlash at home, forced to play down the foreign policy maneuvre as part of an election campaign.
Morrison's Liberal party candidate was a former Australian ambassador to Israel, who went on to lose the seat, delivering the prime minister a minority government.
Commentators said Saturday that the embattled PM - who faces the prospect of an election drubbing next year - was "saving face", sticking to the status quo by holding back an embassy move, and easing tension with his distinction between east and west Jerusalem.
Palestinian groups in Australia have condemned the move.
"Many strong arguments have been advanced between Prime Minister Scott Morrison's floating the idea during the Wentworth by-election campaign and now and most of them have exposed the faulty thinking and flimsy pretexts that underpin the case of the proponents of this move," said the General Delegation of Palestine to Australia and New Zealand on Saturday.