Simon Coveney says the move is "premature and ill-advised"
The leader of Hamas is calling for a new uprising, while Israel's army deploys reinforcements in the West Bank after Donald Trump's decision to recognise Jerusalem as Israel's capital city.
The group says the decision "opened the gates of hell" on US interests in the Middle East.
Palestinian negotiator Saeb Erekat says Mr Trump has "destroyed any possibility" of a two-state solution with Israel.
World leaders have rushed to condemn the decision, with many fearing the move will lead to violent clashes.
Mr Erekat, who is secretary-general of the Palestine Liberation Organisation (PLO), told reporters: "President Trump just destroyed any possibility of a two-state (solution).
"He has taken an action to recognise Jerusalem as capital of Israel - this is in total contradiction of agreements signed between Palestinians and Israelis.
"This step is pre-judging, dictating, closing doors for negotiations.
"And I think President Trump tonight (has) disqualified the United States of America to play any role in any peace process".
Palestinian negotiator Saeb Erekat says Donald Trump has “destroyed any possibility” of a two-state solution. Says Mr Trump has “disqualified” the US from playing any role in the peace process pic.twitter.com/f0XB0FnPPx #Jerusalem (via @nadplo)— Jack Quann (@jqbilbao) December 6, 2017
Presidents and prime ministers from across the globe had warned Mr Trump against moving the US embassy from Tel Aviv to Jerusalem.
Some think the decision could lead to a third Intifada - the ending of Israeli occupation of the West Bank and Gaza - and the kiss-of-death for the peace process.
The Tánaiste and Foreign Affairs Minister Simon Coveney has re-stated Ireland's position on the status of the city.
He said: "Jerusalem is one of the permanent status issues which is to be settled in a final peace agreement in the Middle East.
It has been the united position of the international community for decades, as set out in UN Security Council Resolutions, that a resolution of the Middle East conflict will include agreement for Jerusalem to be the capital of both Israel and the future state of Palestine.
"If the peace negotiations are to be successful, this will happen at the end of the process, when the full set of compromises has been worked out.
"The dangerously heightened tensions in Jerusalem in recent years have also underlined the need to avoid any unilateral actions to alter the status quo in the city.
"I believe therefore that today's announcement by the United States in relation to Jerusalem is premature and ill-advised, and will be unhelpful to efforts to reach a resolution of the Middle East Peace Process, something which is very urgently needed."
Mr Coveney said he conveyed his concern to the US government on Wednesday.
"Today’s announcement is thus very disappointing and difficult to understand.
"Ireland remains fully committed to supporting both parties to reach a peaceful, negotiated solution to the Middle East Peace Process, something which is essential for Israel to secure its future, and for Palestinians to enjoy their full political rights."
British Prime Minister Theresa May said: "We disagree with the US decision to move its embassy to Jerusalem and recognise Jerusalem as the Israeli capital before a final status agreement.
"Our position on the status of Jerusalem is clear and long-standing: it should be determined in a negotiated settlement between the Israelis and the Palestinians, and Jerusalem should ultimately be the shared capital of the Israeli and Palestinian states."
France's president Emmanuel Macron told reporters: "This decision is a regrettable decision that France does not approve of and goes against international law and all the resolutions of the UN Security Council."
President Trump however, has claimed his decision is simply "recognition of reality" and "the right thing to do".
Overturning decades of US policy, Mr Trump declared: "Israel is a sovereign nation with the right like every other sovereign nation to determine its own capital.
"Acknowledging this as a fact is a necessary condition for achieving peace."
Changes around the sensitive city of Jerusalem - a holy site for Muslims, Jews and Christians - risk scuppering the fledgling Arab-Israeli peace agreement brokered by Mr Trump's son-in-law Jared Kushner.
Mr Trump's declaration was also met with anger from the Arab world.
Palestinian President Mahmoud Abbas rejected the US move, calling Jerusalem the "eternal capital of the state of Palestine".
Islamist group Hamas said the decision "opened the gates of hell" on US interests in the Middle East.
Iran warned it would "provoke Muslims" and lead to an "increase in radical, angry and violent behaviour".
Turkey called it "irresponsible" while Egypt's foreign ministry also rejected the US President's declaration.
The decision has been largely welcomed in Israel, which has long considered Jerusalem to be its capital, after it annexed the Old City in 1967.
Israeli prime minister Benjamin Netanyahu, praised America's "courageous and just decision" and said it was a "historic day".
Following the decision, American government personal have been warned to avoid The Old City and the West Bank until further notice.
An updated "Worldwide Caution" has also been issued to US citizens abroad - advising them to "be alert to the possibility of political unrest, violence, demonstrations, and criminal activities."
Additional reporting: IRN