One of the things you have to remember is that the Vatican has been involved in ongoing negotiations with Israel over several decades on a diplomatic level. The Vatican had received a lot of criticism for its refusal to recognize Israel as a state, but the truth was that Israel simply did not meet all of the conditions that the Vatican has in place before it recognizes a nation. One of these conditions is that the nation in question must have clearly-defined borders, and another condition is that the nation's capital cannot be situated in disputed territory. The first issue is the reason why the Vatican has always supported the notion of a Palestinian state, and the second issue is the reason why the Vatican will not accept Jerusalem as Israel's capital.
Neither of those are the real reasons.
First, Israel's borders are only unsettled because the Arab world (with all of its oil wealth) doesn't recognize its right to exist - with the exception of Egypt and Jordan. The borders are very clearly defined - if any army tries to cross into the Golan Heights or over the Jordan River, the IDF will pummel them. Everyone in the world knows it, most especially those with designs on Israel - so much for being undefined. These territories were captured in a defensive war, and Israel has the right under international law to retain them for as long as it wishes. Just what we did, for example, with Texas, New Mexico, Colorado, Arizona, and California, when Mexico started up with us in 1848. When we give back this territory to Mexico, then Israel should give its conquered territory back to the Syrians and Jordan. The same might be said for territory taken by force of arms from the various Indian tribes/nations. I am in favor of none of these scenarios.
BTW, there NEVER was a Palestine ruled by Arabs, and Jerusalem was NEVER a capital for any people or nation other than the Jews and Israel (both ancient and modern). So why does the Vatican stand for them now? Where was the Vatican (and the rest of the world, especially the Arabs) when Jordan ruled Jerusalem and the "West Bank" from 1948-1967? Did the Vatican or any other nation stand up for "Palestine" or "Palestinian rights?" No, they were silent - and this silence was/is deafening.
Regarding Israel's capital being in disputed territory - this is a load of horse manure. Just so you know, Israel's government is located in the western part of the city, and has been since 1948. In view of this fact, to not recognize Israel as a nation, or Jerusalem as its capital, is an incredible insult both to Israel and to Jews worldwide. I would think that the Vatican would have more sense and more sensitivity. The Vatican should at least recognize Israel in its pre-1967 borders as a nation, with the modern part of Jerusalem as its capital.
Personally, I believe that the Vatican refuses to recognize Israel as a nation and Israeli sovereignty over Jerusalem because it doesn't want to acknowledge that anyone can have sovereignty over Christian holy sites. I see no particular problem with such recognition, in view of the fact that Israel has always protected these sights and the right of any Christian to visit them. There are plenty of holy sites for various religions around the world that are part of the sovereign territory of one nation or another. Why is Jerusalem any different? Why is Israel any different?
Thanks, that explains it, "One of these conditions is that the nation in question must have clearly-defined borders, and another condition is that the nation's capital cannot be situated in disputed territory. ", rome doesn't hold to Biblical Truth, therefore they do not accept that God promised Israel to the Jews, and because of that Jerusalem IS NOT disputed territory as far as the Jewish right to it is concerned.