Palestinian President Mahmud Abbas warned on Saturday that moving the US embassy in Israel to Jerusalem would deal a huge blow to hopes for Middle East peace.

Commenting as he opened a Palestinian embassy at the Vatican, Abbas added that anything which legitimised the "illegal Israeli annexation" of Jerusalem would "bury the hopes for a two-state solution, and fuel extremism in our region".

The Palestinian leader held a private meeting with Pope Francis before inaugurating the diplomatic mission, located in a building facing the Vatican that also houses the embassies of Peru and Burkina Faso.

Speaking briefly to reporters, Abbas reiterated his opposition to the possible transfer of the US embassy from Tel Aviv to Jerusalem as President-elect Donald Trump had indicated he might do.

"We cannot say anything yet because it has not happened, but if this does happen it will not help the peace process. I hope it will not happen," said Abbas, speaking in Arabic.

In a separate English-language statement, he hailed the Vatican's hosting of a Palestinian embassy.

"We are very grateful about the role that the Holy See has played for a just and lasting peace in the Holy Land, and for having opened an embassy of Palestine in the Vatican for first time," he said.

But, Abbas expressed concern about Trump's pledge during the election campaign to recognise Jerusalem as the capital of Israel and move the American embassy there.

Such a step would be a historic break with US policy, and with most of the international community, over the status of Jerusalem, also claimed by the Palestinians as capital of their future state, an issue to be settled by negotiation.

"Any attempts at legitimising the illegal Israeli annexation of the city will destroy the prospects of any political process, bury the hopes for a two-state solution, and fuel extremism in our region, as well as worldwide," Abbas said.

"In this moment, we extend our hand to President-elect Trump for his cooperation to make peace based on international law," he added.

Abbas met with Pope Francis for 20 minutes ahead of the embassy opening.

Among the gifts exchanged, Abbas offered the pontiff a stone from the Church of the Holy Sepulchre in Jerusalem, according to Greg Burke, spokesman for the Holy See.

A Vatican statement regarding Israel and the Palestinians added: "Hope was expressed that direct negotiations between the parties may be resumed to bring an end to the violence that causes unacceptable suffering to civilian populations, and to find a just and lasting solution.