Donald Trump has told Palestinian President Mahmoud Abbas that he intends to move the US embassy in Israel to Jerusalem, according to a spokesman.
The embassy is currently in Tel Aviv, and moving it to Jerusalem would be highly significant.
It would end decades of US policy that the city’s status must be decided in negotiations with the Palestinians, and give legitimacy to Israel’s claim over the entire city.
Palestinians want East Jerusalem to be the capital of their future state and the international community does not recognise Israel’s claim.
The city is home to sites that are holy to Muslims, Jews and Christians.
Israel captured East Jerusalem in 1967 and annexed it, but the move was not recognised internationally.
A statement from Mr Abbas’s office said Mr Trump had called the president and told him of “his intention to move the US embassy from Tel Aviv to Jerusalem”.
Mr Abbas “warned of the dangerous consequences of such a decision on the peace process, security and stability in the region and the world”, the statement added.
Political factions led by Mr Abbas’s Fatah movement have called for daily protest marches.
The US has responded by ordering government employees to avoid Jerusalem’s Old City and the West Bank.
World leaders have warned that moving the embassy would inflame tensions in the region, while Islamist movement Hamas said it would cross “every red line”.
Egypt’s president, Abdel Fattah el-Sisi, spoke to Mr Trump and told him there was no need to “complicate” matters in the region, a statement from Cairo said.
President of France Emmanuel Macron also reminded the US President that the future of Jerusalem should be determined in negotiations on setting up a Palestinian state.
Germany’s foreign minister, Sigmar Gabriel, told reporters it would fuel “even more” the delicate situation in the Middle East.
Saudi Arabia’s King Salman also spoke to Mr Trump and warned him it would “inflame the passions of Muslims around the world due to the great status of Jerusalem and the al Aqsa mosque…”, state television reported.
UN Secretary-General Antonio Guterres said he opposed any unilateral action that could undermine a two-state solution.
Israel’s mayor of Jerusalem, Nir Barkat, said on Tuesday that moving the embassy could take “two minutes”.
“They just take the symbol of the consulate and switch it to the embassy symbol – two American Marines can do it in two minutes, and give the ambassador David Friedman a space to sit in,” Mr Barkat told Israel Radio.
Israel says the city has been the capital of the Jewish people for 3,000 years and the country’s capital for 70 years.
Senior US officials said Mr Trump could officially recognise Jerusalem as the capital on Wednesday.
They added that an official announcement on the embassy’s relocation would probably not happen for around six months, but planning would begin straight away.
White House spokesman Hogan Gidley said on Monday that the President had “been clear on this issue from the get-go: it’s not a matter of if, it’s a matter of when”.