President Donald Trump has decided to delay moving the US embassy in Israel from Tel Aviv to Jerusalem, despite promising to do so during the election.
He renewed a waiver for a law requiring the relocation, as his predecessors have done every six months since 1995.
The White House said Mr Trump would fulfil his campaign pledge but wanted to maximise the chances of a peace deal between Israel and the Palestinians.
Palestinian leaders had warned the move would threaten a two-state solution.
Israel has occupied East Jerusalem since the 1967 Middle East war. It annexed the area in 1980 and sees it as its exclusive domain. Under international law the area is considered to be occupied territory.
Israel is determined that Jerusalem be its eternal, indivisible capital. But Palestinians want East Jerusalem to be the capital of a future state.
Successive US administrations since 1948 have maintained that the status of Jerusalem is to be decided by negotiations and that they would not engage in actions that might be perceived as prejudging the outcome of those negotiations.
During last year's election campaign, Mr Trump expressed his strong support of Israel and vowed to order the relocation of the embassy on his first day in office.
But three weeks later, he acknowledged in an interview with an Israeli newspaper that it was "not an easy decision" and that he was still "studying" the issue.
Last month, the president avoided any public mention of a potential move during a visit to Israel and the West Bank, when he declared that he would "do everything" to help Israelis and Palestinians achieve peace.
On Thursday, as a deadline loomed, the White House announced that Mr Trump had continued his predecessors' policy of signing a six-month waiver for the Jerusalem Embassy Act.
"President Trump made this decision to maximise the chances of successfully negotiating a deal between Israel and the Palestinians, fulfilling his solemn obligation to defend America's national security interests," a statement said.
"But, as he has repeatedly stated his intention to move the embassy, the question is not if that move happens, but only when."
Israeli Prime Minister Benjamin Netanyahu's office expressed its disappointment, but said it appreciated Mr Trump's "commitment to moving the embassy in the future".
"Israel's consistent position is that the American embassy, like the embassies of all countries with whom we have diplomatic relations, should be in Jerusalem, our eternal capital," a statement said.
"Maintaining embassies outside the capital drives peace further away by helping keep alive the Palestinian fantasy that the Jewish people and the Jewish state have no connection to Jerusalem."
The Palestinian ambassador to the US welcomed the decision.
"This is in line with the long-held US policy and the international consensus and it gives peace a chance," Hussam Zomlot said in a statement.
"We are ready to start the consultation process with the US administration. We are serious and genuine about achieving a just and lasting peace."