Trump's move to renew the waiver for six months keeps the US embassy in Tel Aviv for now. Trump has said he's reviewing whether to fulfill his campaign promise to move it to Jerusalem.
Trump was facing a Thursday deadline to renew the waiver or see the State Department lose half its funding for its overseas facilities. Presidents of both parties have renewed the waiver every six months for years.
The US says its policy on Jerusalem hasn't changed and that Jerusalem's status must be negotiated between Israelis and Palestinians.
In a statement issued by the White House: "While President Donald J. Trump signed the waiver under the Jerusalem Embassy Act and delayed
"President Trump made this decision to maximize the chances of successfully negotiating a deal between Israel and the Palestinians, fulfilling his solemn obligation to defend America's national security interests. But, as he has repeatedly stated his intention to move the embassy, the question is not if that move happens, but only when."
Prime Minister Benjamin Netanyahu responded by stating, "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.
"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.
"Though Israel is disappointed that the embassy will not move at this time, we appreciate today's expression of President Trump’s friendship to Israel and his commitment to moving the embassy in the future."
The Palestinians praised Trump's decision not to move the US Embassy, saying it strengthens the chances of peace.
President Mahmoud Abbas' spokesman, Nabil Abu Rdeneh, said the decision is an "important positive step" that illustrates the US seriousness about promoting peace.
The Palestinian ambassador to Washington, Hussam Zomlot, said the move "gives peace a chance."
Zomlot said: "We are ready to start the consultation process with the US administration. We are serious and genuine about achieving a just and lasting peace."
A senior Israeli official expressed disappointment over Trump's decision and is accusing the US of caving in to Arab pressure.
Cabinet Minister Yuval Steinitz said the refusal to recognize Jerusalem as Israel's capital makes no sense. Steinitz is a confidant of Prime Minister Netanyahu.
Steinitz told Israel's Army Radio station: "I think the time has come to put an end to this farce. Everybody recognizes Israel as the capital of Israel. When Trump comes here, he goes to Jerusalem, not Tel Aviv."
When told that Trump said he will move the embassy later, Steinitz said: "I hope that happens before the Messiah comes."
He said leaving foreign embassies in Tel Aviv is "a surrender to unfair Arab and Muslim pressure."
Jordan has welcomed President Donald Trump's decision to delay moving the US Embassy in Israel from Tel Aviv to contested Jerusalem.
The pro-Western kingdom had warned that such a move was a "red line" that it would bolster extremists if crossed.
More than half of Jordan's citizens are of Palestinian descent.
Jordanian government spokesman Mohammed Momani said Thursday that "we strongly welcome the decision and highly value the message it is sending."
Momani says the president's decision shows "how much the administration values the advice of its allies" and that the focus must be on relaunching serious Israeli-Palestinian peace talks.