New paragraphs 7-8 make clear U.S. Congress passed law in 1995 that said Jerusalem was capital of Israel and U.S. embassy should move there. But successive presidents, who set foreign policy, have refused to move embassy and U.S. diplomats say U.S. policy is aligned with other major powers in viewing status of Jerusalem as under negotiation between Israel and Palestinians.

WASHINGTON, June 5 (Reuters) - U.S. Democratic presidential candidate Barack Obama amended his support for Israel's stance on Jerusalem on Thursday, saying Palestinians and Israelis had to negotiate the future of the holy city.

Palestinian leaders reacted with anger and dismay on Wednesday to Obama saying Jerusalem should be Israel's undivided capital.

"Well, obviously, it's going to be up to the parties to negotiate a range of these issues. And Jerusalem will be part of those negotiations," Obama told CNN when asked whether Palestinians had no future claim to the city.

Asked if he opposed any division of Jerusalem, Obama said: "As a practical matter, it would be very difficult to execute. And I think that it is smart for us to -- to work through a system in which everybody has access to the extraordinary religious sites in Old Jerusalem but that Israel has a legitimate claim on that city."

In Washington on Wednesday, Obama told the American Israel Public Affairs Committee, a pro-Israel lobby group, that if elected president in November, he would work for peace with a Palestinian state alongside Israel.

"Jerusalem will remain the capital of Israel, and it must remain undivided," he told the lobby group.

The U.S. Congress passed a law in 1995 describing Jerusalem as the capital of Israel and saying it should not be divided, but successive presidents have used their foreign policy powers to maintain the U.S. embassy in Tel Aviv and to back negotiations between Israel and the Palestinians on the status of Jerusalem.

U.S. diplomats say that, despite the U.S. legislation, Washington's foreign policy is in practice broadly aligned with that of the United Nations and other major powers, which do not view Jerusalem as Israel's capital and do not recognise Israel's annexation of Arab East Jerusalem following the 1967 war.

The outgoing U.S. president, George W. Bush, has sponsored peace negotiations between Israel and the Palestinians in the hope of securing a deal on a Palestinian state before he leaves office in January.

One of the thorniest issues is resolving the rival Israeli and Palestinian demands on the future of Jerusalem. (Writing by Howard Goller; Editing by Peter Cooney)

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