Jerusalem's status is a core dispute between Israel and the Palestinians
European Union ministers have called for Jerusalem to serve as the capital of both Israel and a future Palestinian state as part of a negotiated peace.
The foreign ministers dropped an earlier reference stating explicitly that East Jerusalem should be the capital of a Palestinian state.
Palestinians welcomed the statement. Israel said it contained "nothing new".
Jerusalem's status is one of the most sensitive and complex issues in the Israeli-Palestinian conflict.
"If there is to be a genuine peace, a way must be found through negotiations to resolve the status of Jerusalem as the future capital of two states," the statement from EU foreign minsters said.
"The EU will not recognise any changes to the pre-1967 borders including with regard to Jerusalem, other than those agreed by the parties."
Jeremy Bowen, BBC Middle East editor
The EU is trying to strengthen Palestinian leader Mahmoud Abbas. One EU diplomatic source said that they wanted to give him "a ladder to climb down" to allow him to get back to negotiations.
The EU has said before that occupied East Jerusalem should be the capital of a Palestinian state, though never, EU diplomatic sources say, in this forum.
What is most important about the latest statement is its timing. Hopes that President Obama would be able to make quick progress towards a peace based on Palestinian independence alongside Israel have been badly dented.
The EU, along with the US and others, is concerned that a diplomatic standstill plays into the hands of extremists and will encourage a build up of tension leading to more violence in Jerusalem, Gaza and on Israel's border with Lebanon.
Israel, which captured the West Bank in 1967, currently claims sovereignty over the entire city, and claims it as its capital.
Its government welcomed what it called the "balancing and improving" of the EU text, but said it ignored "the primary obstacle to achieving a resolution between Israel and the Palestinians: the Palestinian refusal to return to the negotiating table".
"Israel regrets that the EU has chosen to adopt a text that, although containing nothing new, does not contribute to the renewal of negotiations," it said.
Rafik Alhussieni, chief of staff to Palestinian President Mahmoud Abbas, said: "The statement as a whole is satisfactory because it says that Jerusalem should be the capital of both states and because it refers to the land as occupied land... and mentions that the settlements are illegal and built on occupied land."
On Monday, scores of Palestinians had protested at the French and Swedish consulates in Jerusalem in support of the Swedish EU presidency's proposal for an explicit reference on the east of the city, AFP news agency reported.
Israeli claims of sovereignty over Jerusalem are not recognised internationally, and East Jerusalem is considered to be occupied territory.
Palestinians hope to establish the capital of their future state in East Jerusalem.
"The Council is deeply concerned about the situation in East Jerusalem," the statement from EU foreign ministers said.
"In view of recent incidents, it calls on all parties to refrain from provocative actions.
"It also calls on the Israeli government to cease all discriminatory treatment of Palestinians in East Jerusalem."
The ministers said a recent Israeli decision to restrict the growth of settlements in the occupied West Bank - though not including East Jerusalem - was "a first step in the right direction".
But they also stressed that "settlements, the separation barrier where built on occupied land, demolition of homes and evictions are illegal under international law, constitute an obstacle to peace and threaten to make a two-state solution impossible".
The Palestinian Authority has demanded that all construction is halted before it will again attend peace talks.