Israeli Prime Minister Benjamin Netanyahu has ordered the closure of his country's embassy in Paraguay in response to a decision by the South American nation to move its own embassy back to Tel Aviv from Jerusalem
The decision by newly-elected President Mario Abdocomes comes just months after his predecessor, former President Horacio Cartes, opened the embassy in Jerusalem in May.
The city of Jerusalem has been a fundamental issue in tensions between Israel and the Palestinian, and the latest moves will be a set-back to Mr Netanyahu.
Donald Trump controversially broke from decades of American policy, when he announced a new US policy last year that recognised Jerusalem as Israel’s capital. The previous position was that Jerusalem's status was a matter for Israel and the Palestinians as part of a peace agreement.
The US President also announced plans to relocate the US embassy to Jerusalem, which sparked widespread criticism from world leaders, but was achieved earlier this year.
The Palestinians said their foreign minister, Riyad al-Maliki, met Mr Abdo two weeks ago and hailed Paraguay's change of mind as “a new Palestinian diplomatic achievement.”
“Minister Maliki exerted a big effort during his meeting with the new president who instructed his foreign minister to arrange the issue,” the Palestinian foreign ministry said in a statement.
Israel regards all of the city, including the eastern sector that it annexed after the 1967 war, as its capital.
But the Palestinians, with broad international backing, want East Jerusalem for the capital of a future state they hope to establish in the occupied West Bank and Gaza Strip. Negotiations between the two sides broke down in 2014.
“One of the most complex components of the conflict [between Israel and the Palestinians] is the status of Jerusalem,” said Paraguay’s Foreign Minister Luis Alberto Castiglioni at a news conference.
Mr Castiglioni also said he hoped “the friends of Israel will not be bothered” by Paraguay’s decision to move the embassy back to Tel Aviv and that the South American nation desired to have “excellent ties of friendship and cooperation” with “the states of Israel and Palestine.”
Mr Netanyahu’s office released a statement saying Paraguay’s decision will put a “strain” between the nations.
“Israel views very seriously Paraguay’s exceptional decision which will strain the relations between the countries,” a statement read.
Reuters contributed to this report
