During an elaborate dedication ceremony, Trump addressed a crowd via a taped video message, saying that the opening had been "a long time coming."
"Today, Jerusalem is the seat of the Israeli government, the home of the Israeli legislature and the Israeli Supreme Court and Israel's prime minister and president," he said. "For many years, we failed to acknowledge the obvious ... the plain reality that Israel's capital is Jerusalem."
Israeli Prime Minister Benjamin Netanyahu addressed the crowd, emphatically announcing that Monday was a "glorious day" and thanking Trump.
"Remember this moment, this is history," he said. "President Trump, by recognizing history, you have made history."
U.S. Ambassador to Israel David Friedman, as well as Trump's daughter Ivanka Trump and son-in-law, Jared Kushner, both top aides to the president, also gave remarks.
The contentious move fulfilled a promise by Trump to move the embassy from Tel Aviv to Jerusalem, having already recognized the latter as Israel's capital.
The decision has delighted the Israeli government but angered the Palestinians, and some Western allies are concerned that it will further destabilize the region and hamper the peace process.
Trump, however, maintained that his "greatest hope is for peace" and that the U.S. "remained committed to facilitating a lasting agreement."
Kushner, in his remarks, predicted that the "journey to peace" would start "with a strong America recognizing the truth."
The Gaza Health Ministry said that 41 Palestinians had been killed by Israeli Defense Forces as of Monday morning, and more than 1,700 others were wounded.
Hours before Monday's opening ceremony, Treasury Secretary Steven Mnuchin, who was also present for the dedication ceremony, defended the decision by saying it was "consistent with the interests of the national security of America."
Israeli officials said the Gaza demonstrations were nothing more than cover for terrorist attacks and that they had been instigated by Hamas, the dominant political group in Gaza that the U.S. classes as a terrorist organization.
Moving the embassy breaks with decades of Washington policy and distances the U.S. from its allies, who have kept their embassies in Tel Aviv.
Since the 1979 Camp David Accords, U.S. presidents have refused to recognize Jerusalem as the capital of Israel or move the U.S. embassy. The U.S. approach had formerly been that Jerusalem's status should be negotiated between the Israelis and Palestinians.
The move prompted scathing criticism from Palestinian authorities.
“This move marks the end of an era when the United States led international efforts to supposedly achieve the two-state solution, ending Israel’s occupation that began in 1967 including East Jerusalem," Dr. Husam Zomlot, the head of the Palestine Liberation Organization's General Delegation to the United States, said in a statement.
Compounding tension over the embassy move was the fact that Tuesday is the 70th anniversary of what the Palestinians call the "nakba," or catastrophe, when hundreds of thousands of people were uprooted during Israel's creation in 1948.
Zakaria Odeh, the director of the Civic Coalition for Palestinian Rights in Jerusalem, said he saw the move as a "second Nakba for our people."
"It is the first time that the U.S takes such decision in violation of the international community, consensus, international law, conventions, and U.N. resolutions, which the U.S. is part of," Odeh said. "Trump’s decision will give the Israeli government the green light for more colonial and discriminatory policy actions, more land control, more settlements, more Palestinian displacement, more closures and restricting of Palestinian movement, and access to their city, more revocation of Palestinians residency."
Lawmakers in Israeli and the United States, however, lauded the White House for the decision.
"Today’s dedication is far more than symbolic — it is a concrete reaffirmation of America's commitment to the Jewish state and her people," House Speaker Paul Ryan, R-Wis., said. "America stands with Israel in recognizing Jerusalem as its eternal, ancestral capital — never to be divided again.”
Sen. Chuck Schumer, D-N.Y., called the move "long overdue."
"Every nation should have the right to choose its capital. I sponsored legislation to do this two decades ago, and I applaud President Trump for doing it," Schumer said.
Present for the dedication were several Republican lawmakers, including Sens. Lindsey Graham of South Carolina and Ted Cruz of Texas.
Palestinian leaders have also called for protests across the West Bank on Monday.
The new embassy will remain housed in what was the U.S. consulate until a larger site can be found.
U.S. and Israeli flags adorned the streets around the compound, and police said the tight security would involve units on patrol as well as security balloons.
Israel captured east Jerusalem in the 1967 war and annexed it in a move not recognized internationally.
The Palestinians want east Jerusalem as the capital of their future state, and view the relocation of the embassy to the contested city as a one-sided move that invalidates the U.S. as a Mideast peace broker.