US President Donald Trump will recognise Jerusalem as Israel's capital, senior administration officials have said.
But the officials said Mr Trump would not immediately move the US embassy from Tel Aviv to Jerusalem.
The news comes ahead of an expected speech by Mr Trump on Wednesday.
Arab leaders earlier warned against moving the US embassy in Israel to Jerusalem, with one saying this would be "a flagrant provocation to Muslims".
The status of Jerusalem - a holy site for Israelis and Palestinians - is extremely contentious.
Israel has always regarded Jerusalem as its capital city, while the Palestinians claim East Jerusalem as the capital of a future Palestinian state.
The city is home to key religious sites sacred to Judaism, Islam and Christianity, especially in East Jerusalem.
Israel occupied the sector, previously occupied by Jordan, in the 1967 Middle East war and regards the entire city as its indivisible capital.
The Palestinians claim East Jerusalem as the capital of a future state, and according to 1993 Israel-Palestinian peace accords, its final status is meant to be discussed in the latter stages of peace talks.
Israeli sovereignty over Jerusalem has never been recognised internationally, and all countries maintain their embassies in Tel Aviv.
Since 1967, Israel has built a dozen settlements, home to about 200,000 Jews, in East Jerusalem. These are considered illegal under international law, though Israel disputes this.
In recognising Jerusalem as Israel's capital, the US could reinforce Israel's position that settlements in the east are valid Israeli communities.
What has the US just announced?
The Trump administration officials said recognising Jerusalem as Israel's capital was seen "a recognition of reality" by the US government.
However, specific boundaries of the city would remain subject to a final status agreement, the official said. The status of holy sites will not be affected.
Mr Trump also would direct the state department to begin the process of moving the US embassy to Jerusalem - but this could take several years.
He promised the move to pro-Israel voters during his campaign for the presidency.
The US officials added that the president would be signing a regular waiver blocking the embassy's move from Tel Aviv to Jerusalem until the new building was completed.
Ahead of his formal announcement, Mr Trump phoned several regional leaders to tell them he intended to move the US embassy from Tel Aviv to Jerusalem.
What's been the world reaction?
Saudi Arabia's King Salman bin Abdulaziz al-Saud told Mr Trump that the relocation of the embassy or recognition of Jerusalem as Israel's capital "would constitute a flagrant provocation of Muslims, all over the world".
The White House said the president spoke to Middle East leaders including Israeli Prime Minister Benjamin Netanyahu on Tuesday.
Among the reaction from those leaders:
Palestinian leader Mahmoud Abbas warned "of the dangerous consequences such a decision would have to the peace process and to the peace, security and stability of the region and of the world"
Jordan's King Abdullah said the decision would "undermine efforts to resume the peace process" and provoke Muslims
Egypt's President Abdul Fattah al-Sisi urged Mr Trump "not to complicate the situation in the region"
US government employees and their families have been barred from personal travel in Jerusalem's Old City and the West Bank for security reasons ahead of expected protests.
Turkish President Recep Tayyip Erdogan warned his country could sever ties with Israel if the US recognised Jerusalem as its capital.
And Ismail Haniya, the chief of the Islamist Hamas group that runs Gaza, said a shift of the embassy and recognition of Jerusalem as the Israeli capital would cross "every red line".
France, the European Union and the Arab League have also expressed concern.
Israel's intelligence minister Israel Katz told Army Radio that Israel was "preparing for every option", including an outbreak of violence.
Why is this happening now?
Analysis by Barbara Plett-Usher, state department correspondent
By recognising Jerusalem as Israel's capital President Trump is fulfilling a campaign promise. There is no other obvious reason he's doing this now.
Administration officials said he would simply be acknowledging reality - that Jerusalem functions as Israel's capital. They said the decision would not determine final status issues such as boundaries and sovereignty - that's still left to negotiations.
On other core issues of the Israeli-Palestinian conflict, Arab and Muslim leaders might be able to work with changes in the US approach. But Jerusalem is also holy land, not just a disputed capital.
Jordan and Saudi Arabia are custodians of Islam's holy sites and have issued strong warnings that this move could inflame the Muslim world.
There's also no indication that this is a bargaining chip to advance the peace process: according to the officials, Trump's not expected to publicly endorse a two-state solution.
It sounds like the Palestinians will get nothing. Perhaps there is a wider strategy at work, but it looks like a workaround so the president can satisfy his pro-Israel voters.