He is also directing the State Department to initiate the relocation of the American embassy from Tel Aviv to the contested city Jerusalem, which is claimed by Israelis and Palestinians. The move is expected to take a number of years.
"My announcement today marks the beginning of a new approach to conflict between Israel and the Palestinians," Trump said during a public address from the Diplomatic Reception Room at the White House.
“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 place of greater understanding and cooperation,” he said. "This is nothing more or less than a recognition of reality."
But Mark Perry, a former advisor to Palestinian leader Yasser Arafat, disputed Trump's characterization.
"It is anything but," he told Anadolu Agency.
The president's decision places the U.S. at odds with decades of American policy, as well as the rest of the international community, except Israel. No nation has its embassy in Jerusalem. It is also likely to stymy any effort to restart long-stalled peace Israeli-Palestinian peace talks.
"All of America's most important allies advised the president against this decision," said Perry. "And, so it is -- in satisfying Israel, America is isolated and alone once again. This is not the action of a great power, but one in retreat."
Palestinians have been seeking East Jerusalem as the capital of their future state during peace talks. It has been occupied by Israel since 1967.
UN Secretary General Antonio Guterres stressed the importance of a two-state solution after Trump said the U.S. would support it "if agreed to by both sides."
Guterres told reporters at the UN's New York headquarters that it is only by realizing the vision of two states "living side-by-side in peace, security and mutual recognition, with Jerusalem as the capital of Israel and Palestine, and all final status issues resolved permanently through negotiations" that the aspirations of both parties can be achieved.
Long-time Israeli premier Benjamin Netanyahu has dropped his support for the proposal after appearing to publicly endorse it in 2009.
In the waning days of former President Barack Obama’s administration, then-Secretary of State John Kerry said Palestinians have a shared claim to Jerusalem. Netanyahu condemned Kerry's speech at the time, calling it "unbalanced.”
Trump will sign a six-month waiver off-setting the embassy's relocation on national security grounds in order to avoid cuts to the State Department budget during the transition period, according to an official knowledgeable on the matter.
Successive U.S. presidents of both parties have signed the waiver since the Jerusalem Embassy Act went into law in 1995, perpetually forestalling the building's legislated move over concerns it could spark a diplomatic crisis and be a death knell for peace talks.
"Some say they lacked courage, but they made their best judgement based on facts as they understood them at the time," Trump said referring to past presidents who signed the waiver. "Nevertheless the record is in. 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."
Nonetheless, the decision was met with opposition from activists.
"Trump had the gall to call his upheaval of decades of strategic White House policy a 'new approach',” said Emily Mayer, a national coordinator with IfNotNow, a progressive Jewish-American group that opposes the Israeli occupation.
"But this is not a new approach — it is an act of incitement from the Trump administration against Palestinians and a recipe for disaster. Today’s announcement only entrenches Israel’s military occupation of Palestinian land and drives Israelis and Palestinians farther away from the lasting 'peace' he so callously talked about," she told Anadolu Agency.
But the American Israel Public Affairs Committee, the most powerful pro-Israel lobbying group in the U.S., said Trump's declaration "acknowledges that Jerusalem will continue to be Israel’s capital as part of any conceivable final status agreement.
"Today's action by President Trump is an important, historic step for which we are grateful. We urge the president to quickly relocate our embassy to Israel's capital," it said in a statement.
Palestinian leaders have already called for three “days of rage” to contest Trump’s decision.
Jerusalem is considered holy to Jews, Christians and Muslims, and changes to the contested city’s status quo have been historically met with fierce opposition.
Israel’s decision to restrict Muslim access to the al-Aqsa mosque compound in 2015 set off widespread street violence between Palestinians and Israeli security forces. And an Israeli decision to install controversial metal detectors at the mosque's entrance earlier this year was ultimately reversed after being met with mass protests by Palestinians.
In making his announcement, Trump called on all parties to maintain the status quo at Jerusalem's holy sites, including Haram al-Sharif, or the Aqsa compound.
Vice President Mike Pence will visit the region "in the coming days to reaffirm our commitment to work with partners throughout the Middle East to defeat radicalism that threatens the hopes and dreams of future generations", Trump said.