Mr Morrison said Australia would set up a trade and defence office in West Jerusalem.

Labor foreign affairs spokeswoman Penny Wong said the outcome confirmed the original idea of shifting the embassy, aired on October 16, had been a “cynical ploy” to gain votes in the byelection for the eastern Sydney seat of Wentworth.

Opposition Leader Bill Shorten said he wondered whether Mr Morrison “really knew what he was doing” when he made his original announcement.

“I’m tempted to think it was a sort of rookie mistake by an L-Plate prime minister, but it is a little more serious than that,” Mr Shorten said.

“My fear is that Mr Morrison hasn’t just had to do a political backdown, my fear is that he has made Australia look stupid on the international stage.”

Australian talks with Indonesia over a $16.5 billion trade deal have been stalled since the announcement because of concern at the surprise decision, made at a time when Palestinian officials were visiting Jakarta.

Dian Islamiati Fatwa, a member of the main opposition coalition led by Prabowo Subianto and a political candidate in the 2019 election, said many people would not understand the distinction the Morrison government was attempting to make between West Jerusalem and Jerusalem.

She also called for the free trade deal between Australia to be put on ice.

“For many people, they won’t understand the difference between West Jerusalem and East Jerusalem. For them recognising West Jerusalem will be recognising Jerusalem,” she said.

“The question for Muslim people will be whether this is fair for Palestinians. When I heard the announcement I had to check three times exactly what it meant – so for many people, who don’t have good literacy, it will upset them.”

An already strong critic of the free trade deal, Ms Islamiati said following the announcement that the trade deal should be put on hold.

“If the Indonesians [are] hurt, they won't buy cattle, meat, wheat and services from Australia. Eventually it would hurt Australian people even worse,” she said.

Bernard Abdul Jabbar, the secretary-general of the influential Islamist 212 Alumni Brotherhood protest movement, said the announcement from Mr Morrison was a better one compared to his previous statement.

“I’ve read that the Saudi government and governments of some Middle Eastern states have threatened Australia if it moves its embassy to Jerusalem,” he said.

“So maybe Australia’s statement today is in response to the economic threats [over trade] from the Saudi government and other states in Middle East?

“I find Australia's statement is sissy. Although I must say it is a better one compared to previous statement. At least it shows Australia did not recklessly make its decision. But why didn’t Australia explicitly say it supports Palestinian independence, for instance?”

Asked if his group would begin protests outside the Australian embassy in Jakarta, given it has not been involved in the small protests there so far, Mr Jabbar said: “It is our duty to fight for the independence of Palestine until the last drop of blood.”

Mr Morrison’s new position acknowledges Palestinian aspirations but does not recognise a Palestinian state or East Jerusalem as its capital.

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Australia Palestine Advocacy Network vice president Bassam Dally, a professor and a Palestinian Australian, said Mr Morrison’s position was not balanced because it acknowledged aspirations rather than the right to statehood.

“What the average Australian will not see is that this is not a balanced policy,” Professor Dally said.

“It acknowledges the Israeli rights over Jerusalem but only the aspirations of the Palestinians.

“Why not recognise the Palestinian state? What are we waiting for?”

The Executive Council of Australian Jewry has strongly welcomed Mr Morrison’s comments in the past but was unable to respond to his latest announcement because it was made on the Sabbath.

“It has long been the position of the ECAJ that Australia should recognise Jerusalem as the capital of Israel and consider relocating the Australian embassy, currently in Tel Aviv, to the government precinct in west Jerusalem,” the council said in October.

“Every state has the right to determine where within its sovereign territory its capital should be located. Jerusalem was the capital of the Jewish state 3000 years ago and it remains so today.”