During the election Trump vowed to recognise Jerusalem as Israel's capital
The White House says that Donald Trump's administration is "beginning" to discuss moving the US embassy in Israel to Jerusalem.
It would fulfill a pledge Mr Trump made on the campaign trail, to transfer the US's diplomatic mission from Tel Aviv where it is at present.
White House spokesman Sean Spicer said in a statement "We are at the very beginning stages of even discussing this subject."
Speaking about the topic, Sky's Diplomatic Editor Dominic Waghorn said the move is potentially explosive.
"In the 1967 war, Jerusalem was annexed in a move regarded as against international law and a UN resolution has decided Israel's position that it is the eternal capital of Israel is against international law because it has no resolved status, in negotiation.
"If America puts its embassy there it effectively recognises Jerusalem as the capital of Israel," before adding "That is denying Palestinians a chance to have a capital there.
"They also claim Jerusalem as their capital, and it is a most important shrine in Islam, so it has lot of importance for Muslims as well as Israel."
The announcement comes just after it emerged that Israel has approved building permits for hundreds of new homes in three East Jerusalem settlements.
The move is thought to be in expectation of the US President following different policies to the previous administration who criticised new building in settlements.
The housing projects are on land the Palestinians want to include in a future state.