The Guardian has rowed back from its claim that Tel Aviv is the capital of Israel after a media-monitoring group threatened legal action.

The newspaper conceded that its style guide was wrong to state that “Jerusalem is not the capital of Israel; Tel Aviv is”.

Its U-turn came after a long-running argument over a picture of passengers on Jerusalem’s light railway which appeared in the Guardian’s centre pages, and on its website, in April.

The caption alongside the picture initially referred to the city as Israel’s capital, prompting a later “correction” noting that the caption had “wrongly referred to the city as the Israeli capital”.

Media-monitoring group HonestReporting complained to the PCC, claiming that the Guardian had breached the regulatory body’s clause on accuracy, but the PCC rejected the complaint.

HonestReporting subsequently sought legal advice and claimed it had threatened the PCC that it would seek a judicial review.

The latest clarification, published on Wednesday, raised the 1980 Knesset law designating Jerusalem as the country’s capital, and the UN Security Council’s subsequent resolution calling for diplomatic missions in the city to be withdrawn.

The Guardian concluded: “While it was therefore right to issue a correction to make clear Israel's designation of Jerusalem as its capital is not recognised by the international community, we accept that it is wrong to state that Tel Aviv – the country's financial and diplomatic centre – is the capital. The style guide has been amended accordingly.”

Joe Hyams, HonestReporting chief executive, said: “This correction is a significant achievement against a newspaper that has been a major contributor to the broader delegitimisation of Israel in the UK and beyond.

“It is shocking that it has taken the threat of legal action to reverse a decision that was not based on reality.”

He called on the PCC to issue new ruling “categorically stating that Tel Aviv is not Israel’s capital”.