Dar es Salaam — Tanzania risks losing US financial support, some analysts have warned.
The country has maintained its stand to continue regarding Tel Aviv as Israel's capital against the US stand.
Israel itself says Jerusalem is its capital, the position that US President Donald Trump backs.
The US has vowed to cut off aid to countries that denounced Trump over the Israeli capital.
The Economic Diplomacy Department head at the Tanzania-Mozambique Centre for Foreign Relations (TMCFR), Dr Ahmed Mtengwa, said the US decision put the Middle East peace deal at a crossroads.
However, he said Tanzania should make its decision in accordance with its economic diplomacy policy.
"The US and Israel are close allies; so President Trump's announcement was expected. Tanzania should support the side which can be more beneficial to it economically in accordance with the economic diplomacy," he said.
Tanzania has maintained its stand to continue considering Tel Aviv the Israeli capital despite the US threats.
It was among 128 countries that voted in favour of a UN General Assembly resolution, rejecting Trump's position on December 21.
Weeks before the vote, Foreign Affairs and East African Cooperation minister Augustine Mahiga said Tanzania's Embassy in Israel would remain in Tel Aviv, dismissing reports that it was ready to shift to Jerusalem from Tel Aviv.
The former TMCFR director, Prof Abdallah Safari, believes the US has lost legitimacy to mediate in the Israel-Palestine conflict.
The Shadow minister for Foreign Affairs and East African Cooperation, the Rev Peter Msigwa, said there was no need for Tanzania to vote as it had already stated its stand.
The Rev Msigwa, who is also the Iringa Urban MP said: "We have started seeing effects as support in health services has been reduced."
However, Prof Mwesiga Baregu, of St Augustine University of Tanzania, believes it is important for the country to stick to its economic diplomacy policy while defending the Palestinian cause.
"Although there is a price to pay, it's necessary for us to come forward and make our position known globally. Since we are independent then our stand should be respected however it's against that of the US," he said.
Tanzania has opened its embassy in Tel Aviv. Israel is expected to open its consulate in Tanzania next year.
For 22 years, the Israeli embassy in Kenya had also been serving Tanzania.
Tanzania established its diplomatic relations with Israel in 1963. But in 1973, the ties were severed following the Yom Kippur war involving Israel, Egypt and Syria.
Tanzania's foreign policy, based on principles of justice and freedom for all human beings irrespective of where they lived, supported the causes of the downtrodden.