Romney used the term on Sunday to sustained applause from his Israeli audience in the Holy City, during a trip to present himself as Israel's closest ally ahead of the November 6 election contest with President Barack Obama.
"We condemn his statements. Those who speak about the two-state solution should know that there can be no Palestinian state without East Jerusalem," chief Palestinian negotiator Saeb Erekat told Reuters on Monday.
"What this man is doing here is just promoting extremism, violence and hatred, and this is absolutely unacceptable," he said. "His statements are just rewarding the occupation and aggression."
Israel seized east Jerusalem during a 1967 war. A UN Security Council resolution condemns a 1980 Israeli law that declared Jerusalem the "complete and undivided" capital of the country as a violation of international law.
Most countries, including the United States, have not recognised Israel's declaration and have kept their embassies in the coastal city of Tel Aviv.
Previous US presidential candidates, including Senator Obama in June 2008, have referred to Jerusalem as Israel's capital ahead of elections, only to row back when taking power and suggest the issue should be resolved by negotiations.
A senior aide to Palestinian President Mahmoud Abbas, Nabil Abu Rdeineh, said Romney's statements were unhelpful, stood in the way of a peace settlement and "contradict the previous positions held by the American administration".
Palestine Liberation Organisation (PLO) secretary general Yasser Abed Rabbo said: "American policy makers must abandon hypocrisy and stop attempting to gain votes at the expense of the Palestinian people's rights."
He added: "Mr Romney must understand that such an era has ended and Arab nations who are rebelling for the sake of freedom and dignity will not allow him to mess with their fates in order to win some votes."
Romney met Palestinian Prime Minister Salam Fayyad briefly in Jerusalem on Sunday, but did not travel to the nearby occupied West Bank, focusing primarily on Israeli leaders.
In an interview with CNN, Romney refused to be pinned down on whether he would recognise Jerusalem as Israel's capital if he beats Obama and wins the White House.
"A nation has the capacity to choose its own capital city, and Jerusalem is Israel's capital," he said.
"I think it's long been the policy of our country to ultimately have our embassy in the nation's capital, Jerusalem. The decision to actually make the move is one, if I were president, I would want to take in consultation with the leadership of the [Israeli] government which exists at that time. So I would follow the same policy we have in the past."
'Thrown Israel under a bus'
Pressed on whether he would make the move on becoming president, Romney said: "I'm not going to make foreign policy for my nation, particularly while I'm on foreign soil. My understanding is the policy of our nation has been a desire to move our embassy ultimately to the capital."
Seeking US Jewish and fundamentalist Christian votes, Romney has criticised Obama on Israel, alleging last year that the president had "thrown Israel under a bus" in pushing hard for a two-state solution between Israel and the Palestinians.
Direct peace talks brokered by Washington ground to a halt in 2010 and attempts to get the two sides back to the negotiating table have since failed.
Romney did not criticise Obama by name during his two-day stay but made some pointed criticisms of his policies.
Israel's Defence Minister Ehud Barak made clear on Monday he was happy with the support received from the US president.
"This American administration of Obama has been giving unprecedented backing to Israel's security … This administration has done a lot to maintain Israel's qualitative advantage," he told Israel Radio. – Reuters