Withdrawing the PLO's 1988 recognition would threaten decades of Israeli relations with the moderate Palestinian leadership and raise doubts over security coordination between the two.
It would also be seen as a fatal blow to the two-state solution, already on life support following the White House's December recognition of Jerusalem as Israel's capital in December.
The PLO's Executive Committee released a statement after a three-hour meeting on Saturday saying it would set up a committee to study the derecognition move.
The organisation's top body was meeting for the first time since the Palestinian Central Council, another arm of the PLO, called for the step last month.
The executive committee on Saturday urged the Palestinian Authority of president Mahmud Abbas to "immediately start preparing plans and projects for disengagement steps with the Israeli occupation government at the political, administrative, economic and security levels."
The Palestinians, who also see the city as their capital, cut off ties with Trump and said his decision had placed in jeopardy their relations with Israel.
Last month, the PLO's Central Council called on the Executive Committee to suspend recognition of Israel until it recognises the state of Palestine and halts the building of Jewish settlements on occupied Palestinian land.
Western countries have been lobbying senior Palestinian officials to convince them not to take such a step, multiple diplomats said.
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