While Israeli officials hailed the decision as a magnanimous gesture, a spokesman for the university said the concession had come as a result of non-violent activism.
"(This was) a result of the continued peaceful resistance which took place on the university grounds for the past 30 days and especially of the pressure exerted by US National Security Adviser Condoleezza Rice and US Middle East envoy John Wolf," the university president's spokesman Dimitri Diliani said on Monday.
Israel agreed to change the route of the barrier in order not to damage the campus after Israeli Defence Ministry Director General Amos Yaron met with Sari Nusseibeh, the president of al-Quds university, said Diliani.
"In the meeting today, the army decided to alter its plans for the apartheid wall and moved it westward in order to minimise damage to the university campus," Diliani said.
The wall has already been erected in parts of the West Bank. Israel says it is intended to prevent resistance attacks, but Palestinians claim it is an Israeli attempt to annex still more of their territories.
According to the orginal plans, it would have sliced through and impoverished the university campus, stripping it of around a third of its grounds, including gardens and sports facilities.
In recent weeks, al-Quds students had organised sit-ins and other peaceful activities to occupy the grounds and prevent Israeli bulldozers from starting construction.
Israel's wall, which has received heavy criticism from Washington - its main ally - will effectively separate the West Bank from east Jerusalem, which the Palestinians want as the capital of their future state and which Israel captured in 1967.