Massoud Shajareh, of Britian's Islamic Human Rights Commission, has demanded an apology after the publisher made the reference in its Mini Atlas of the World.
Jerusalem is the third holiest site in the world for Muslims, and the scene of the Prophet Muhammed’s night journey to the Al-Aqsa mosque.
The overwhelming majority of the international community recognises Tel Aviv, not Jerusalem, as the country's capital.
“I think this is just ridiculous, an outrage,” said Shajareh on Wednesday.
“They should apologise immediately. They are saying something that is untrue and contrary to international law."
He added: "They just shouldn’t be making loaded statements like this. It is legitimising the Israeli occupation of Palestine."
But Shajareh added the reference and "horrendous blunder" did not surprise him given that Harper Collins is owned by Rupert Murdoch, the American media tycoon.
Murdoch owns a string of newspapers and TV stations which have steadfastly adopted a pro-Israeli line.
Rupert Murdoch's media empire
has adopted a pro-Israeli line
“I don't know if this is a politically motivated statement but I find it really difficult to explain away otherwise," said Shajareh.
Meanwhile, Harper Collins have said they are investigating the matter.
Sarah Bailey, managing director of reference books at Harper Collins UK, said she is waiting to speak to the atlas’s editor before responding.
“If they are wrong according to our codes of practice we will withdraw the books,” she said.
The status of Jerusalem is a highly sensitive issue and has stalled peace negotiations on many occasions between the Palestinians and Israel.
Under a 1947 United Nations partition plan Jerusalem was placed under international custodianship.
But when Israel defeated Syria, Jordan and Egypt in the 1967 Arab-Israeli war, the city was annexed in defiance of international law.
Only two countries recognise Jerusalem as the capital of Israel - El Salvador and Costa Rica.
Even the US refers to Tel Aviv as the country's capital.