"This decision is driven by our global efforts to improve the efficiency and effectiveness of our operations", Pompeo said.
"It does not signal a change of US policy on Jerusalem, the West Bank [Judea and Samaria], or the Gaza Strip", Pompeo said in a statement, adding that a new Palestinian Affairs Unit will be located inside the US Embassy in Jerusalem.
In December 2017, United Nations member states voted decisively at the General Assembly in favour of a resolution effectively declaring U.S. recognition of Jerusalem as Israel's capital to be "null and void" and demanding it be cancelled.
The Prime Minister goes on to say that the former Ambassador of Australia to Israel, Dave Sharma, suggested several months ago that moving the Australian embassy to Jerusalem from Tel Aviv could allow for Australia to both, recognize Jerusalem as the capital of Israel and move toward a two-state solution.
The announcement comes after the May 14 opening of the new embassy in Jerusalem, which had been required by US law for almost 20 years.
Placing it under the authority of the embassy could be seen as American recognition of Israeli control over the occupied West Bank and East Jerusalem.
Israeli sovereignty over Jerusalem has never been recognised internationally, and according to the 1993 Israel-Palestinian peace accords, the final status of Jerusalem is meant to be discussed in the latter stages of peace talks.
"I think people respect that countries will take positions on things from time to time", he said. "He is practically saying Jerusalem is for Israel".
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Asked if the US government is anticipating security concerns in either Jerusalem or in the Palestinian controlled areas, the senior State official said there was no "imminent or particular threat" but that the safety of Americans overseas is the highest priority.
"Recognising this simple fact would in no way preclude a future agreement between Israel and the Palestinians and we welcome the Prime Minister's affirmation of support for a two-state solution". "This decision has nothing to do with peace".
Since 1967, Israel has built a dozen settlements, home to about 200,000 Jews, in East Jerusalem.
The administration in December recognized Jerusalem as Israel's capital, ending a decades-long USA position that the status of the city should be determined in negotiations.
"The Trump administration is part of the problem, not part of the solution", Erekat said in a statement.
Since he became US ambassador to Israel, Friedman, a longtime supporter and fundraiser for the West Bank settlement movement, had argued he should have authority over the consulate, which for decades has operated differently than nearly every other USA consulate around the world.
Pompeo denied the decision represented a shift in relations between Washington and the Palestinians, but it came after a series of moves, including shuttering the Palestinian mission in Washington, that have angered them.
The unit will be located at the former USA consular site on Argon Road in West Jerusalem. In contrast, the consul general running the Jerusalem consulate historically had his or her own chief of mission authority.