The Supreme Court overturned a law Monday that would have allowed US passport holders born in the disputed city of Jerusalem to record their country of birth as "Israel."
After lengthy deliberation, the court decided that the 2002 law breaches the president's sole right to determine US policy in questions of international sovereignty.
"The nation must speak with one voice," the majority ruling argued, adding that Congress "may not aggrandize its power" at the expense of another branch of government.
Israel regards Jerusalem -- which it has fully controlled since winning the 1967 Six Day War -- as its historic and undivided capital.
Palestinians, however, see much of the city as occupied territory and want the capital of a future independent state to be located there.
Washington has not recognized the city as belonging to either side, and its final status is one of the thorniest issues in the Middle East peace process.
The parents of Menachem Zivotofsky -- born in 2002 -- sued the US government when his issued passport gave "Jerusalem" and his date of birth, without assigning a country.
Congress backed them, passing a bill to force the issue and the then president, George W. Bush, signed it into law under protest.
He accompanied his assent with an official note objecting to the clause authorizing Jerusalem-born US citizens to request "Israel" be written in their passports.
On Monday, in a decision that had been keenly anticipated since a hearing on the issue in November last year, the court upheld the White House's right to ignore the law.
"The provision forces the president, through the secretary of state, to identify, upon request, citizens born in Jerusalem as being born in Israel when, as a matter of United States policy, neither Israel nor any other country is acknowledged as having sovereignty over Jerusalem," the court said in a ruling presented by Justice Anthony Kennedy.
Six of the nine Supreme Court judges, including the three Jewish members of the bench, backed the ruling, but Chief Justice John Roberts objected.
"Today's decision is a first: Never before has this court accepted a president's direct defiance of an act of Congress in the field of foreign affairs," he argued.
Conservative judge Antonin Scalia also objected to the ruling, insisting that "competing powers" -- in this case Congress and the White House -- are at the heart of the US constitution.
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"International relations formed no exception to that principle," he said. "The Jerusalem passport law has nothing to do with recognition."
Ari Zivotofsky, Menachem's father, told AFP the family was "disappointed."
"We were optimistic and thought that the justices would see it our way," he said.
"One of the things that now could be done – the court very clearly put this into the president’s lap, and basically said it’s up to him to change this policy," he added, noting Obama now had "a very clear opportunity to do something concrete."
- 'Vanity plates' -
Tom Lee, an expert in both constitutional and international law at Fordham Law School, sided with the majority, arguing that Congress's attempt to pass a law on passports was intended to force Obama's hand.
"Passports aren't vanity plates for citizens to make political statements facilitated by Congress about sovereignty claims in foreign lands," he argued.
Israeli Immigration Absorption Minister Zeev Elkin reacted to the decision by declaring that Jerusalem is the capital of the Jewish state and "will remain that for eternity."
Elkin, whose portfolio includes Jerusalem, called on the US administration to accept "the simple fact that is a fundament of Jewish heritage, and incidentally of Christian heritage as well -- Jerusalem is the heart of the Land of Israel, and the eternal capital of the State of Israel!"
A representative of the Palestinian Liberation Organization meanwhile called the decision "encouraging."
The US State Department cautiously welcomed the verdict.
Spokesman Jeffrey Rathke said the ruling "confirms the long-established authority of the president over the conduct of diplomacy and foreign policy.
"The decision also respects his ability to ensure that his determinations regarding recognition are accurately reflected in official documents and diplomatic communications, including passports."
Rathke said it had been longstanding US policy not to recognize any state's sovereignty over Jerusalem and that, while the administration was "not doing a victory dance," it was glad that this remains clear.