But a peak Zionist group has described the decision as "very disappointing", saying the way it was handled had caused deep hurt in Australia's Jewish community.

The move, announced by Foreign Minister Penny Wong on Tuesday, reversed former prime minister Scott Morrison's controversial decision to label West Jerusalem as Israel's capital.

Both Israel and Palestine claim Jerusalem, host to holy sites for Jews and Muslims, as their capital. Australia had recognised Tel Aviv as the capital until 2018, and still maintains its embassy in the city.

Nasser Mashni, vice president of the Australia Palestine Advocacy Network, said Australia's Palestinian population had consistently been made an "other" and excluded from public debate, portrayed as "one organic mob of bearded, screaming Islamo-fascists".

But Mr Mashni was "heartened" by Labor's reversal, which he said moved Australia back to the international consensus.

"The really hurtful thing is that Australian Palestinians are this political football. We're never consulted," he said.

"We're contributing Australians. We participate in the vibrancy, in the democracy that is Australia, but we're not considered.

"We're looking forward to a situation where we no longer have the words of the past, which talk about Israel's right and Palestinian aspiration."

Mr Morrison made his announcement during a 2018 campaign for the Sydney seat of Wentworth, home to a large Jewish community, and with his parliamentary majority in jeopardy.

Mr Mashni was "absolutely shocked" to learn of the decision, which he said was insulting to both Jewish and Palestinian Australians.

"It said: vote for my guy because we'll give you Jerusalem. That was anti-Semitic," he said.

"But so too is it anti-Palestinian not to consider Australian Palestinians, and how we might feel about our eternal cultural, spiritual, economic [and] educational heartland.

"Jerusalem is that important to us as well."

But Zionist Federation of Australia president Jeremy Leibler labelled Labor's handling of the announcement "very disappointing", saying it had caused deep upset with the Australian Jewish community.

Mr Leibler said Mr Morrison's decision "was essentially recognising [the] reality" that Israel's major government buildings - its parliament and supreme court - were located in Jerusalem.

"Every Australian ambassador and politician that meets the Israeli prime minister or president does so in Jerusalem, because that's Israel's capital. The Morrison government position merely reflected that," he said.

Mr Morrison's announcement came after then-US President Donald Trump made a similar declaration, moving the US embassy to Jerusalem from Tel Aviv.

And given Mr Trump's successor Joe Biden has maintained that position, Mr Leibler rejected suggestions Australia had been out-of-step with the international community.

"The Biden administration hasn't felt the need to reverse that decision, despite the fact the Democrats have elements that are far more antagonistic to Israel than there are in the ALP," he said.

"This is largely because, whether or not Biden agreed with the decision at the time, recognition of Jerusalem as Israel's capital simply reflects reality."

But Rand, 22, a Palestinian activist based in Sydney said Palestinian voices were "blatantly and completely disregarded" after the Coalition's 2018 decision.

Rand said she held both Australian and Israeli passports, and it was "incredibly isolating" to feel unrepresented by both governments.

"[It came] at the cost of Palestinian self-determination, completely ostracising the Muslim and Arab community within Australia," she said.

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She urged Labor to go further, saying it could not frame itself as an "ally of justice and peace" without focusing on the liberation of Palestinians.

"This is a good first step in undoing the harmful damage that the Morrison government has done," she said.

"The hypocrisy is that Australia is quick to point out human rights abuses in the world, recently in Asia, but remains inconsistent in its support for justice and accountability when it comes to Palestine."