Instead, AmbassadorDavidFriedman will set up shop in existing consular offices in the leafy middle-class Arnona neighbourhood on the city's southern edge for the near to mid-term.
Eventually, a purpose-designed embassy will be planned and built, according to the US State Department.
"Initially, the interim embassy in Arnona will contain office space for the ambassador and a small staff," a US official told AFP, declining to give further details.
"The ambassador will continue to divide his time between Tel Aviv and Jerusalem during the initial phases of the embassy move, as this is a multi-year process."
So far around $400,000 has been spent on upgrades to the building, a US embassy spokeswoman said.
US President Donald Trump will not attend the inaugural event, but Washington will be represented by Deputy Secretary of State John Sullivan, Treasury Secretary Steven Mnuchin, Trump's daughter Ivanka and her husband, senior White House aide Jared Kushner.
The foreign diplomatic corps has not been invited as the event is considered a bilateral one, the embassy spokeswoman said.
Trump's unilateral decision delighted Israelis and enraged Palestinians, who want to make the eastern, mainly Palestinian, part of the city the capital of their future state and say that Trump's decision ignores their demands.
Jerusalem Mayor Nir Barkat says the city will name a small roundabout adjacent to the embassy as "Trump Square".
"Naming this square in honour of the president is our way of showing our love and respect for the president and the American people," he said in a statement.
The question of Jerusalem is one of the thorniest issues in the Israeli-Palestinian conflict.
Senior Palestinian official Saeb Erekat has called for diplomats, "civil society organisations, and religious authorities to boycott the inauguration."
"Those who attend the ceremony will be sending an ominous message, a message that they encourage flagrant violations of international law and (of) the inalienable rights of the Palestinian people," he said.
The building, which opened to the public in 2010, houses consular operations including American citizen and visa services.
Those functions "will continue at the Arnona facility without interruption, as part of the embassy," the US official said.
The modern, sleekly designed building is about a mile from the east Jerusalem Palestinian neighbourhood of Jabel Mukaber, home to several perpetrators of militant attacks -- including one in 2015 that killed two Israelis and a US-Israeli dual national.
Security at the US facility has been visibly beefed up of late, with security guards permanently on guard on the street outside and several Israeli border police jeeps parked nearby.
Last week, street signs in the neighbourhood were switched to read "US Embassy" in Hebrew, Arabic and English, replacing signs saying "US Consulate."
On social media, the US embassy updated its Twitter handle to @usembassyjlm.
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