The announcement by President Donald Trump on Wednesday was a "dangerous violation of international law," had no legal impact and was "void," the Arab League said in a statement after a session attended by all its members in Cairo.
Trump's endorsement of Israel's claim to all of Jerusalem as its capital would reverse long-standing U.S. policy that the city's status must be decided in negotiations with the Palestinians, who want East Jerusalem as the capital of their future state.
"The decision has no legal effect ... it deepens tension, ignites anger and threatens to plunge region into more violence and chaos," the Arab League said at 3 a.m. local time after hours of meetings that began on Saturday evening.
It said it would seek a U.N. Security Council resolution rejecting the U.S. move.
Lebanon's Foreign Minister Gebran Bassil said during the emergency meeting that Arab nations should consider imposing economic sanctions against the United States to prevent it moving its Israel embassy to Jerusalem from Tel Aviv.
"Pre-emptive measures (must be) taken ... beginning with diplomatic measures, then political, then economic and financial sanctions," he said, without giving specific details.
The Arab League statement made no mention of economic sanctions.
Arab criticism of Trump's plan contrasted sharply with the praise Washington's traditional Arab allies heaped on him at the beginning of his administration in January.