It follows Donald Trump’s widely condemned decision to move the US embassy and recognise Jerusalem as Israel’s capital.
Guatemala was one of nine nations that voted with the United States when the UN General Assembly overwhelmingly adopted a non-binding resolution denouncing Mr Trump’s policy earlier this week.
The Central American country’s President, Jimmy Morales, wrote on Facebook on Christmas Eve that after talks with Israeli Prime Minister Benjamin Netanyahu, he decided to instruct his foreign ministry to move the embassy from Tel Aviv to Jerusalem.
This despite the UN declaring the US action as “null and void” by a margin of 128-9. Thirty-five nations abstained and 21 stayed away from the vote.
No other country has its embassy in Jerusalem, though the Czech Republic is considering such a move.
Israel regards all of Jerusalem as its capital, while the Palestinians claim the city’s eastern sector. This was captured by Israel in 1967 and is home to sensitive religious sites.
Mr Trump’s announcement, which upended decades of US policy, has set off weeks of clashes between Palestinians and Israeli security forces that have left 12 Palestinians dead.
Meanwhile, Mr Netanyahu posted his Christmas message on Twitter with the caption: “Merry Christmas from Jerusalem, the capital of Israel!”