"I thank my friend the president of Serbia... for the decision to recognise Jerusalem as Israel's capital and to transfer his embassy there," Netanyahu said, adding that the controversial move would happen by July 2021.
Serbia to move its embassy from Tel Aviv to Jerusalem: Israeli PM
Serbia will transfer its embassy from Tel Aviv to Jerusalem, becoming the first European country to follow the US in making the move, Israeli Prime Minister Benjamin Netanyahu said Friday.
Traditionally, most diplomatic missions in Israel have been in Tel Aviv as countries stayed neutral over the disputed city of Jerusalem until its status could be settled in an Israeli-Palestinian peace deal.
But US President Donald Trump smashed that taboo in December 2017 by recognising Jerusalem as Israel's capital and shifting the US embassy from Tel Aviv to the city, holy to the three Abrahamic faiths.
Israel seized control of East Jerusalem in 1967 and later annexed it in moves never recognised by the international community.
Israel considers the city its undivided capital, but Palestinians see the mostly Arab eastern part of Jerusalem, including the Old City with its holy sites, as the illegally occupied capital of their future state.
The United Nations and the European Union, Israel's top economic partner, say the city's final status must be negotiated between Israelis and Palestinians, until which countries should not locate their embassies there.
News of the move by Serbia, not a member of the 27-nation EU, coincided with the announcement by Trump on Friday that former foes Serbia and Kosovo had agreed on a historic pact to normalise economic relations.
"A truly historic day," Trump said at the White House flanked by Kosovo Prime Minister Avdullah Hoti and Serbian President Aleksandar Vucic.
Netanyahu also thanked Trump for Serbia's decision to shift its embassy to Jerusalem.
"I would like also to thank my friend President Trump for contributing to this achievement," he said in a Hebrew-language statement.
He also announced that Israel had set up diplomatic relations from Kosovo, which gained its independence from Serbia in 2008.
"Kosovo will become the first majority-Muslim country to open an embassy in Jerusalem," Netanyahu said in a statement.
Trump's decision to move the embassy out of Tel Aviv and Jerusalem three years ago triggered Palestinian outrage and a diplomatic shockwave. So far only Guatemala followed in his footsteps, also opening up its diplomatic mission in the holy city in May 2018.
Friday's announcement also comes less than a month after Israel and the United Arab Emirates agreed to normalise ties under a US-brokered deal.
The agreement, expected to be signed at a White House ceremony in coming weeks, would be Israel's first with a Gulf nation, and the third with an Arab country after those it reached with its neighbours Egypt in 1979 and Jordan in 1994.
The issue of Jerusalem is one of the most sensitive in the decades-long Israeli-Palestinian conflict.
The Old City, a UNESCO World Heritage site, includes Islam's third holiest site -- the golden Dome of the Rock and Al-Aqsa mosque compound.
It is also home to the Western Wall, the holiest place where Jews are allowed to pray, and the Church of the Holy Sepulchre on the site where Christians believe Jesus was crucified and buried.
More than 200,000 Israelis live in east Jerusalem alongside around 300,000 Palestinians.
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