The US demand that Israeli settlement activity in the West Bank must cease includes East Jerusalem, a State Department spokesperson said on Monday.

In response to a question from Israel's Jerusalem Post newspaper, State Department spokesperson Ian Kelly said, “We’re talking about all settlement activity, yeah, in the area across the line,” he said, referring to the 1948 armistice line, or Green Line.

Speaking at a Washington press briefing, Kelly had no immediate response to the proposed Israeli government 2009-2010 budget that allocates 250 million dollars over the next two years for settlements in the occupied West Bank.

Tens of millions of dollars are specifically earmarked for settlements like Har Homa, which, while they are built on occupied Palestinian land, are within Israel’s expanded municipal boundaries for Jerusalem.

Israel occupied East Jerusalem along with the rest of the West Bank, Gaza, the Sinai Peninsula, and the Golan Heights in June 1967. In 1980 Israel annexed the eastern half of Jerusalem, declaring the whole of the city it 'eternal capital,' a step rejected by the UN Security Council.

International law makes no distinction between settlements built in Jerusalem and those in the rest of the West Bank. US policy has also historically not drawn a distinction. In a 1991 Letter of Assurances, entered in the official record of the Madrid Peace Conference, the US said, "We do not recognize Israel's annexation of East Jerusalem or the extension of its municipal boundaries."

Israel and the US are currently at odds over President Barack Obama’s demand that all construction in settlements must cease as a precondition for renewed peace talks.