The move ended US neutrality on one of the region’s most sensitive issues.
Arab League foreign ministers now say it means the US cannot be relied upon as a broker of Middle East peace.
The statement by 22 countries, including close US allies, comes after a third day of violence and protests in the West Bank and Gaza Strip.
Israel has always regarded Jerusalem as its capital, while the Palestinians claim East Jerusalem – occupied by Israel in the 1967 war – as the capital of a future Palestinian state.
For Mr Trump the decision fulfils a campaign promise and he has said it was “nothing more or less than a recognition of reality”.
But he has faced fierce criticism for the decision.
The Arab League resolution was agreed at 03:00 (01:00 GMT) after hours of talks in Cairo. It was backed by a number of US allies, including the United Arab Emirates, Saudi Arabia and Jordan, who had already voiced their concern.
The resolution said:
- The US had “withdrawn itself as a sponsor and broker” of any possible Israeli-Palestinian peace process through its decision
- Mr Trump’s move “deepens tension, ignites anger and threatens to plunge region into more violence and chaos”
- A request would be made for the UN Security Council to condemn the move
At an emergency meeting of the UN Security Council on Friday, the US found itself isolated, with the other 14 members all condemning Mr Trump’s declaration.
But US ambassador Nikki Haley accused the UN of bias, saying it “has outrageously been one of the world’s foremost centres of hostility towards Israel”, and that the US was still committed to finding peace.
On Saturday, Israel’s Prime Minister Benjamin Netanyahu said he had heard “voices of condemnation over President Trump’s historic announcement” but had “not heard any condemnation for the rocket firing against Israel that has come and the awful incitement against us”.
Three rockets were fired towards Israel from Gaza on Friday, leading Israel to carry out air strikes in response. It said it hit military sites belonging to the Islamist group Hamas, killing two of its members. (Courtesy BBC)