The announcement also does away, for all intents and purposes, with the idea that President Trump was planning to turn the consulate into a USA embassy in a new Palestinian State whose capital would be eastern Jerusalem.
The drafters of the plan, Trump's son-in-law Jared Kushner, his top Middle East negotiator Jason Greenblatt and his ambassador to Israel David Friedman, have taken pains to say that the plan will not necessarily endorse Palestinian statehood.
The US is to merge its consulate general in Jerusalem, which deals with Palestinian affairs, with its new embassy, the secretary of state says.
The Palestinian Authority (PA)'s Minister of Foreign Affairs Riyad Al-Malki condemned the U.S. decision, saying it "proves that the United States administration has adopted the agenda of the far-right Israeli settler movement, treating the entire area of historic Palestine as one political unit under Israeli control", Wafa reported. "It does not signal a change of USA policy on Jerusalem, the West Bank, or the Gaza Strip", Pompeo continued.
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.
"This decision has nothing to do with "efficiency" and a lot to do with pleasing an ideological USA team that is willing to disband the foundations of U.S. foreign policy, and of the global system, in order to reward Israeli violations and crimes", he said.
"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".
The primary problem, however, in recent years has been the very refusal of Palestinian leaders to enter negotiations and efforts to instead achieve their state through a unilateralist, worldwide strategy that includes attempts to delegitimise Israel.
The embassy was officially transferred on May 14, sparking violent protests in Gaza in which more than 60 Palestinian protesters were killed by Israeli fire.
In May, the United States moved its embassy in Israel from Tel Aviv to Jerusalem signaling the United States' recognition of Jerusalem as Israel's true capital.
The status of Jerusalem goes to the heart of the Israeli-Palestinian conflict.
But the Palestinian leadership rejected Pompeo's remarks.
The administration, Pompeo said, remains "strongly committed to achieving a lasting and comprehensive peace that offers a brighter future to Israel and the Palestinians".
"Other countries have gone to great lengths to avoid having the same representatives to Israel and the Palestinian Authority", he told AFP, pointing out even small countries separate their Palestinian and Israeli operations.
Israeli Prime Minister Benjamin Netanyahu during a reception ceremony for the United States delegation ahead of the moving USA embassy to Jerusalem.
Trump has been angered by the Abbas boycott and has cut hundreds of millions of dollars in aid in a bid to force them back to the negotiating table.