An expected announcement by President Donald Trump that the US will become the first country to recognise Jerusalem as Israel's capital has been dubbed a "kiss of death" for the Middle East peace process by the Palestinians.
But an Israeli minister urged other countries to follow the US lead.
Mr Trump is expected to confirm the decision in a speech later.
He will also approve moving the US embassy from Tel Aviv to Jerusalem, US officials say.
This could, however, be delayed because of logistical and security issues, as well as the need to find a location.
The prospect of Jerusalem recognition has prompted global reaction ranging from concern to alarm.
The Palestinians' representative to the UK, Manuel Hassassian, told the BBC that the changes to US policy on Jerusalem amounted to a "kiss of death" for the two-state solution in peace efforts and were like a "declaration of war".
"This is the last straw that will break the camel's back," he said. "I don't mean war in terms of conventional war, I mean war in terms of diplomacy."
Israeli Prime Minister Benjamin Netanyahu has yet to comment officially, but Education Minister Naftali Bennett described it as a "big step towards regional peace" and said other countries should move their embassies too.
He added that it would force Israel's "enemies" to accept that Jerusalem would never be divided.
But Pope Francis called for the "status quo" to be respected. Dialogue would only come through "recognising the rights of all people" in the region, he said.
Theresa May said she would speak to Mr Trump about the US move.
The UK's position on Jerusalem had not changed, the prime minister told Parliament. The city's status should be the subject of negotiation and it should be the shared capital of Israel and a Palestinian state, she added.
Israel has always regarded Jerusalem as its capital, while the Palestinians want East Jerusalem to be the capital of a future Palestinian state.
In recognising Jerusalem as Israel's capital, the US becomes the first country to do so since the foundation of Israel in 1948.
What is so contentious about Jerusalem's status?
The issue goes to the heart of Israel's conflict with the Palestinians, who are backed by the Arab and wider Islamic world.
The city is home to key religious sites sacred to Judaism, Islam and Christianity, especially in East Jerusalem.
Israel annexed the sector from Jordan after the 1967 Middle East war and regards the entire city as its indivisible capital.
According to the 1993 Israel-Palestinian peace accords, its final status is meant to be discussed in the latter stages of talks.
Israeli sovereignty over Jerusalem has never been recognised internationally and all countries maintain their embassies in Tel Aviv.
Since 1967, Israel has built a dozen settlements, home to about 200,000 Jews, in East Jerusalem. These are considered illegal under international law, though Israel disputes this.
In recognising Jerusalem as Israel's capital, the US could reinforce Israel's position that settlements in the east are valid Israeli communities.
What is the US proposing?
Trump administration officials said recognising Jerusalem as Israel's capital was an acknowledgment of "historical and current reality" by the US government.
However, specific boundaries of the city would remain subject to a final status agreement, the officials said. The status of holy sites would not be affected.
Mr Trump would also direct the state department to begin the process of moving the US embassy to Jerusalem – but this could take several years as it still has to be designed and built and security concerns would need to be addressed.
He originally promised the move to pro-Israel voters during his campaign for the presidency.
The US officials added that the president would still sign a regular waiver blocking the embassy's move from Tel Aviv to Jerusalem until the new building was completed.
Successive presidents have signed waivers on the grounds of national security for the 1995 Jerusalem Embassy Act, which mandates moving the embassy.
Mr Trump has vowed to pursue a peace agreement between Israelis and Palestinians, led by his son-in-law and top adviser Jared Kushner.
An administration official said the new US policy on Jerusalem was not designed to favour Israel in that process.
What other reaction has there been?
- Saudi Arabia, an ally of the US, called the new policy "a flagrant provocation to Muslims"
- Hamas leader Ismail Haniya said recognition crossed "all red lines"
- China warned against escalating tensions in the Middle East
- Jordan's King Abdullah said the decision would "undermine efforts to resume the peace process"
- Egypt's President Abdul Fattah al-Sisi urged Mr Trump "not to complicate the situation in the region"
- Turkey called for a summit of Muslim countries in December to discuss the developments
- Iranian President Hassan Rouhani said "Muslims must stand united against this major plot"
No sign it's a bargaining chip
Analysis by Barbara Plett-Usher, state department correspondent, BBC News
By recognising Jerusalem as Israel's capital President Trump is fulfilling a campaign promise. There is no other obvious reason he is doing this now.
Administration officials said he would simply be acknowledging reality – that Jerusalem functions as Israel's capital. They said the decision would not determine final status issues such as boundaries and sovereignty – that is still left to negotiations.
On other core issues of the Israeli-Palestinian conflict, Arab and Muslim leaders may be able to work with changes in the US approach but Jerusalem is also holy land, not just a disputed capital.
Jordan and Saudi Arabia are custodians of Islam's holy sites and have issued strong warnings that this move could inflame the Muslim world.
There is also no indication that this is a bargaining chip to advance the peace process: according to the officials, President Trump is not expected to publicly endorse a two-state solution.
It sounds like the Palestinians will get nothing. Perhaps there is a wider strategy at work but it looks like a workaround so the president can satisfy his pro-Israel voters.