The Iraqi Foreign Ministry said it had summoned the USA ambassador in Baghdad and that it would hand him a memo protesting Trump's decision.
"We caution against the unsafe repercussions of this decision on the stability of the region and the world", an Iraqi government statement said.
The spiritual head of Iraq's Shiites Grand Ayatollah Ali Sistani in a statement "denounced and condemned the American decision that injures the feelings of hundreds of millions of Arabs and Muslims".
An Iranian-backed militia in Iraq threatened Thursday to attack USA forces in the country after President Donald Trump recognised Jerusalem as Israel's capital, while Baghdad summoned Washington's envoy.
"Trump's stupid decision... will be the big spark for removing this entity [Israel] from the body of the Islamic nation, and a legitimate reason to target American forces", said Akram al-Kaabi, the Iraqi organization's leader, as cited by Reuters.
"This will not change the fact that Jerusalem is an occupied territory that needs to be returned to its legitimate Palestinian owners", he said.
The U.S.is leading an worldwide coalition helping Iraq fight Islamic State and has provided key air and ground support. It has more than 5,000 troops in Iraq.
It fights under the umbrella of the Popular Mobilisation Forces (PMF), a mostly Iranian-backed coalition of Shia militias that played a role in the battle against IS.