Palestinians, with broad worldwide backing, want East Jerusalem as the capital of a future state they hope to establish in the occupied West Bank and the Gaza Strip.
Palestinians say they're shocked and dismayed by the suggestion Australia could move its embassy to Jerusalem.
Australia will also review its support for the Iran nuclear agreement due to "potentially destabilizing behavior in the Middle East when it comes to the activities of Iran", Morrison said Tuesday.
Mr Morrison credited Liberal candidate Dave Sharma - a former ambassador to Israel - with putting the embassy issue on the table.
While threatening to anger rural voters, Morrison's potential policy shift could help his government retain its one- seat parliamentary majority.
"Scott Morrison is now so desperate to hang on to his job, he is prepared to say anything if he thinks it will win him a few more votes -even at the cost of Australia's national interest", said Labor's foreign policy spokeswoman Penny Wong.
Wentworth, the former Sydney blue-ribbon electorate of Malcolm Turnbull, has a large Jewish community and voters will go to the polls this weekend.
"You can achieve both" the two-state solution and Jerusalem being Israel's capital, he claimed. If Australia went ahead with the move, it would join just the U.S. and Guatemala, who also relocated their embassy this year.
The ministry concluded by calling on Morrison to reconsider his remarks, which harm Australia's interests and its global standing, expressing hope that the Australian opposition, civil society organizations, the business sector and the Arab and Islamic communities would press the Australian government to reconsidered its position set by David Sharma before it becomes official.
The ministry stressed, in a statement, that such a move would be "in violation of global law and United Nations resolutions, particularly Security Council Resolution 478 (1980)".
Israel regards all of the city, including the eastern sector that it annexed after the 1967 Middle East war, as its capital while the Palestinians, with broad worldwide backing, want East Jerusalem as the capital of a future state that they hope to establish in the occupied West Bank and the Gaza Strip.
"The two-state solution means nothing without an equitable resolution to these final-status issues".
There have been many diplomatic efforts to realize a two-state solution, but the last US-led Palestinian-Israeli peace talks came to a halt in April 2014, under the Obama administration.
Worldwide consensus has been that Jerusalem's status should be settled in a peace deal and recognising it as a capital for either side would prejudice one party over the other.
In the decades since 1967, worldwide consensus has been that the city's status must be negotiated between the two sides.
"West Jerusalem, where the Knesset and the other main organs of the Israeli government are located, has been sovereign Israeli territory since 1948", stressed Leibler.
Israel's victory in the Six-Day War gave it control of Arab East Jerusalem, including the Old City.