"Israel views the decision of the Australian government to open its Trade and Defence office in Jerusalem as a step in the right direction," the Israeli Foreign Ministry said in a statement.
The Palestinians' Erekat said the move stemmed from "petty domestic politics."
"The policies of this Australian administration have done nothing to advance the two-state solution," Erekat said in a statement. "All of Jerusalem remains a final status issue for negotiations, while East Jerusalem, under international law, is an integral part of the occupied Palestinian territory."
Indonesia's foreign ministry spokesman, Arrmanatha Nasir, noted that Australia had not moved its embassy to Jerusalem and called on all members of the United Nations to recognise a Palestinian state "based on the principle of two-state solutions".
The status of Jerusalem, home to sites holy to the Muslim, Jewish and Christian faiths, is one of the biggest obstacles to a peace agreement between Israel and Palestinians who want East Jerusalem recognised as the capital of a Palestinian state.
Israel regards all of Jerusalem as its capital, including the eastern sector that it annexed in a move not recognised internationally, after the 1967 Middle East war.
