Adelson, a Las Vegas casino tycoon and hard-line supporter of Israel, has offered to pay the difference between the total cost of the embassy and what the Trump administration is able to raise, four US officials told The Associated Press on Friday.
US State Department lawyers are looking into the legality of accepting private donations to cover some or all of the embassy costs, said the US officials, who were not authorized to discuss the issue publicly and demanded anonymity.
The total price tag to build the new embassy to replace the current one in Tel Aviv is estimated at around $500 million. It is unclear how much of the cost Adelson might be willing to cover.
The State Department said it had "nothing to announce" and "no confirmation or details about this hypothetical proposal."
The discussions are occurring as the Trump administration plans a formal opening of a temporary embassy in May, more than a year ahead of schedule.
The projected embassy opening in May would concide with the 70th anniversary of the Nakba Day (Day of Catastrophe), which marks the anniversary of the forcible eviction of hundreds of thousands of Palestinians from their homeland by Israelis in 1948.
A US official said that one possible scenario is for the administration to solicit contributions not only from Adelson, but potentially from other donors in the American Jewish and Christian Zionist communities.
However, it is not clear if government lawyers would give the green light to accept Adelson's or anyone else's donations.
Allowing private citizens to fund the the costs of an official government building would mark a significant departure from historical practice.
Palestinian chief negotiator Saeb Erekat said the move showed Trump was determined to destroy the prospects for a two-state solution and "provoke the feelings of the Palestinian people."
Allowing donations from Adelson or others would come with significant political risk for Trump. The president already faces major criticism from Palestinians and others for declaring the disputed city of Jerusalem al-Quds as Israel's capital.
In December, Trump announced the US would relocate its embassy from Tel Aviv to the holy city, triggering massive protests in Palestinian territories and around the world.
For years, Adelson has pushed the United States government to move its embassy to al-Quds.
Adelson, who donated $5 million to Trump's inaugural committee, is one of the Republican Party's biggest donors and a major supporter of Prime Minister Benjamin Netanyahu. Adelson also finances Israel Hayom, a pro-Netanyahu newspaper that is distributed free throughout Israel.