Foreign Minister Penny Wong announced on Tuesday the government had overturned a decision by former prime minister Scott Morrison in 2018 to move Australia's embassy from Tel Aviv to West Jerusalem.
She said the move was made in an attempt to win a by-election in the Sydney seat of Wentworth, which has a high Jewish population.
However, former Wentworth MP Dave Sharma, who contested the by-election and lost but later won the seat, criticised the government's reversal.
"This was a policy made on the run, it wasn't planned, it wasn't rolled out properly, it wasn't handled well," he told ABC Radio on Wednesday.
"This was not communicated to Israel's government in advance, which is the normal courtesy you would extend to a friend in international relations."
Both Israel and Palestine claim Jerusalem as their capital.
Mr Sharma said the government had failed to lay out the national interest as to why the recognition of the capital had changed.
He also criticised the timing of the announcement, being on a Jewish holiday.
"In withdrawing recognition of Jerusalem as the capital of Israel, (Senator Wong) is not only damaging a relationship with a close and trusted partner, but she is at odds with many of Israel's Arab neighbours," he said.
"This Labor reversal sets peace back, by providing a tailwind to extremists and states such as Iran who insist that Israel has no rightful place in the region."
Palestinian diplomats in Australia welcomed the decision, saying it was a step in the right direction towards a two-state solution.
They have also called on the government to recognise Palestine as a state.
While Australia's decision to reverse the recognition of the Israeli capital has brought it back into line with other foreign nations.
However, Israel's Prime Minister Yair Lapid expressed disappointment in the decision.
"Jerusalem is the eternal undivided capital of Israel and nothing will change that," Mr Lapid said in a statement.
Opposition foreign affairs spokesman Simon Birmingham called the handling of the reversal shambolic.
"The government can't provide any compelling reason as to why they have done it, let alone why they have done it now," he told the ABC.
"The Israeli government was not consulted or informed properly. And the announcement was made at a sensitive time both on the Jewish calendar as well as in the timing of the Israeli elections."
Energy Minister Chris Bowen said the decision had been to change back to bipartisan policy.
"The capital of Israel should be resolved in terms of that discussion as part of the two state solution," he said.
"That used to be uncontroversial until Scott Morrison and Dave Sharma, in the most pathetic attempt at partisan politics I have seem in a long time, changed that policy on the run in the middle of a by-election campaign."
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