“Oh, you’re from Australia?” The question came in a heavy New Jersey accent from a lady holding a large poster labelling United States Secretary of State John Kerry a war criminal. “Congratulations, you finally have a good government again!”

In February, she joined thousands of Israeli settlers and their supporters in Ma’ale Adumim, one the largest settlements in the West Bank, to protest against freezes in settlement construction during ongoing negotiations between Israel and Palestine. Negotiations broke down again, and new housing units in Israel’s West Bank and East Jerusalem colonies are again being regularly announced.

Under fire domestically and lampooned abroad, one promise Prime Minister Tony Abbott is making good on is his pledge to work at “restoring” relations between Australia and Israel. Last Thursday’s announcement by Attorney-General George Brandis that the government would no longer refer to internationally recognised Palestinian territories in East Jerusalem as “occupied” was another step towards fulfilling that pledge.

Israel has held the Palestinian territories and parts of the Syrian Golan Heights since the 1967 Six-Day War. More than 500,000 settlers now live behind the heavily fortified gates of hilltop enclaves of suburbia and in the fraught climate of Jerusalem’s Old City and the suburbs comprising East Jerusalem. Jerusalem is central to both national narratives and, in recent years, settlement expansion proved a continual stumbling block in negotiations as encroaching colonies choke any notion of a functioning Palestinian state before it’s born. The city, known as Al-Quds (the Holy) in Arabic, is also a sensitive concern for Muslims in the region and internationally.

While paying homage to the international community’s desire for a negotiated two-state solution, Australian prime ministers are traditionally vocal supporters of Israel. The analysis of Abbott and the demonstrator in Ma’ale Adumim — that Australia-Israel relations required restoration — stems from the 2012 vote in the United Nations General Assembly recognising Palestinian statehood, when Julia Gillard’s government adopted a modicum of impartiality in the ongoing conflict by abstaining. The decision was not hers but forced by a Labor caucus determined not to vote against a mostly symbolic upgrade in the Palestinians’ status. Gillard was promptly rounded on by the Liberal opposition and Rupert Murdoch’s press.

Since taking power, the Abbott government has defied international orthodoxy by sending its ambassador to meet the Israeli Housing Minister in Jerusalem — a diplomatic statement that angered the Palestinians — and, in January, Foreign Minister Julie Bishop asked whether settlements were “illegal” during a trip to Israel.

Thursday’s announcement continues the trend, taking Australia’s position beyond that of the United States. At a cabinet meeting on Sunday Israeli Prime Minister Benjamin Netanyahu commended the “courage” of the Australian government to “challenge the sanctification of lies” in its new determination. Critics have invoked the Fourth Geneva Convention, which provides protections for civilians in war zones, and point to the International Criminal Court’s 2004 designation of settlements as illegal.

For Palestinians, the reaction has ranged from official outrage to public confusion. On Sunday, Australia’s representative in the Palestinian territories was called to the Palestinian foreign ministry for a rebuke.

Saeb Erakat, senior negotiator for the Palestinian Liberation Organisation, told Crikey Australia’s position was “shameful” and promised the Arab League would take “concrete action” at economic, political and diplomatic levels. “This will simply reaffirm the will of the Israeli government to continue its colonisation and forced displacement policies in occupied East Jerusalem, which is one of the main obstacles for peace to prevail,” he said.

With more than $6 billion in exports to the Middle East in 2010, Erakat hopes international bodies such as the Arab League and Islamic Conference can exert some influence on Canberra. Meetings are set to be held later in June; on Tuesday, Australia’s charges d’affairs in Amman was called to hear Jordanian foreign ministry concerns.

“Australia should decide whether it wants to be on the right or wrong side of history,” he said. “There are seven United Nations Security Council resolutions reaffirming the fact East Jerusalem is under occupation.”

Issa Amro, a Palestinian from Hebron and activist with Youth Against Settlements, says he cannot understand the determination. “We see the occupation every day in checkpoints, closed shops and children having trouble to go to school. As Palestinians suffering human rights violations we see this decision as helping the oppressor and continuing the occupation,” he said.

He says he expected more from a country supposedly promoting democracy and human rights. “As Palestinians we love Australian people, and it won’t change the image of the Australians we know are working for peace.”