"With its latest step, America has chosen to be a part of the problem, not a solution, and lost its mediator role in the Middle East peace process," Erdogan told the Chatham House international affairs think tank.
His remarks came as violent clashes erupted along Gaza's border ahead of the controversial embassy opening, leaving 37 Palestinians dead and hundreds wounded in the conflict's bloodiest day in years.
Erdogan urged the international community to "take swift action to put an end to Israel's increasing aggression," denouncing the embassy move as violating international law and UN resolutions.
Jerusalem is one of the most thorny issues of the Israeli-Palestinian conflict, with both sides claiming it as their capital.
"The establishment of an independent Palestinian state with Jerusalem as its capital is the only way for lasting peace and stability," the Turkish leader said.
By the time the ceremony to inaugurate the embassy began, the clashes had been raging for more than five hours.
"The nuclear deal is a significant development which should be preserved," Erdogan said, adding that political dialogue with Iran was "beneficial" to the international community.
Turning to Turkey's decades-long efforts to join the European Union, Erdogan said it remained a strategic goal for Ankara but he condemned the "politicisation" of the process.
Erdogan, who has dominated Turkey's political scene for the past 15 years, is seeking to reinforce his authority as Turkey moves to a new presidential system of government with expanded powers.
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