Arab leaders have warned the Trump administration's decision would subvert decades of USA foreign policy and risk triggering further conflicts and violence in the Middle East.
Palestinians want East Jerusalem as the capital of their future independent state, whereas Israel has declared the whole city to be its "united and eternal" capital.
"At the same time, I appeal strongly for all to respect the city's status quo, in accordance with the relevant United Nations resolutions", the Pope said in his weekly address, reports AFP.
Pope Francis said he was "profoundly concerned" and appealed for the status quo of Jerusalem to be respected and for "wisdom and prudence" to prevail.
Speaking during a weekly address in Vatican, the Pope said: "I can not keep silent on my deep concern for the situation that has been created in the past days".
The pontiff added that maintaining the status quo was important "in order to avoid adding new elements of tension to an already volatile world that is wracked by so many cruel conflicts".More news: Storm Caroline heads for Britain
The Vatican has long sought an internationally guaranteed status for Jerusalem that safeguards its sacred character for Jews, Muslims and Christians.
He spoke of having open communication and holding talks between differing religions "and also in civil society".
"The primary condition of that dialogue is reciprocal respect and a commitment to strengthening that respect, for the sake of recognizing the rights of all people, wherever they happen to be".
Francis spoke by telephone Tuesday with Palestinian leader Mahmoud Abbas, after President Donald Trump told Abbas of his decision to recognize Jerusalem as Israel's capital.
Jerusalem remains at the core of the Israel-Palestine conflict, with Palestinians hoping that East Jerusalem - now occupied by Israel - might eventually serve as the capital of a future Palestinian state. Moreover - similar steps could be interpreted as a clear signal for the rejection of Washington's two-state solution to the conflict in the region.
This irked Israel because his predecessor had always gone first to Israel and entered the territories from Israel.