"In May, the United States plans to open a new U.S. Embassy in Jerusalem", State Department spokeswoman Heather Nauert said in a statement.
"East Jerusalem is the capital of the State of Palestine, an integral part of the territory occupied by Israel since 1967", he said.
Trump administration officials said State Department lawyers were evaluating the legality of accepting private donations to fund the move, including a contribution offer from casino mogul and GOP donor Sheldon Adelson.
The decision to move the embassy was widely condemned by the global community over concerns the action would undermine the prospects for a peace deal between Israelis and Palestinians. Israel has annexed East Jerusalem and declared the entire city as its capital, a move not recognized by the worldwide community.
In a speech Friday to the Conservative Political Action Conference outside Washington, Trump recalled his decision to recognize Jerusalem as the capital. He said that ultimately, his administration "did the right thing".
Administration officials have suggested that a longer timeframe may have helped to keep peace efforts alive while sparing the USA the sensitive issue of choosing a site for the embassy.
On the same day, Israeli Prime Minister Benjamin Netanyahu hailed the US announcement as "a great day for the people of Israel".
Nakba ("catastrophe" in Arabic) is the word used by Palestinians to describe the establishment of Israel in 1948.
The date was chosen to coincide with 70th anniversary of Israel's independence.
"The hardest deal to make of any kind is between the Israelis and Palestinians", Trump told reporters Friday at the White House.
Erekat warned that the result of the American move would be "the destruction of the two-state option, as well as a blatant provocation to all Arabs and Muslims".