JERUSALEM // Israel yesterday refused to halt a settlement project in East Jerusalem, rejecting US pressure to include such construction in the eastern part of the city as part of a general freeze on settlement building in occupied territory.

Washington’s public challenge to Israel on settlement construction in East Jerusalem has set the two sides firmly at opposite poles, and analysts describe the issue as a crucial test of the Obama administration’s intentions vis-à-vis the Palestinian-Israeli conflict.

The US state department took the unusual step over the weekend of summoning Michael Oren, the Israeli ambassador to the US, to tell him that Washington does not want the housing project – 20 units in the Sheikh Jarrah neighbourhood being developed by American Jewish millionaire Irving Moskowitz – to go ahead.

Benjamin Netanyahu, the Israeli prime minister, yesterday rejected the American request out of hand, saying Israeli rule over East Jerusalem was not negotiable.

“We cannot accept the idea that Jews will not have the right to live and buy anywhere in Jerusalem,” Mr Netanyahu said, referring to the city as the “united capital” of Israel.

Saeb Erekat, the chief Palestinian negotiator, dismissed Mr Netanyahu’s comments and said the Israeli prime minister understands that a peace agreement is only possible with East Jerusalem as the capital of Palestine, and that settlements and negotiations “cannot go together”.

Israel annexed the eastern part of Jerusalem after capturing it in the 1967 war. The annexation has not been recognised internationally and Israel’s claim to sovereignty over all of Jerusalem violates international law, which forbids states from acquiring territory in war.

The idea of a unified Jerusalem has broad popular appeal in Israel, and there is cross-party consensus on maintaining Israeli sovereignty over the entire city, making the issue one of the thorniest in peace negotiations with the Palestinians, who see East Jerusalem as part of the occupied West Bank and the future capital of any Palestinian state.

The US has traditionally toed the international line on Jerusalem by not recognising Israel’s annexation. At the same time, Washington has turned a blind eye to Israeli settlement building in East Jerusalem, some of which, like the Sheikh Jarrah project now in question, is financed by US investors.

In fact, the US Congress, in which there is overwhelming bipartisan support for Israel including for its claim to an undivided Jerusalem, has for years tried to pressure successive administrations to move the US Embassy in Tel Aviv to Jerusalem. Such a move would clearly signal US acceptance of Israel’s claim to sovereignty over the whole city, and every year presidents have to sign a waiver postponing any decision on the embassy move.

Thus, the latest move by the Obama administration seems to signal an abrupt departure from Washington’s normally hands-off approach to East Jerusalem. As such, say analysts, it is a significant development.

“This is the first time in 20 years that we have a US administration willing to go public with its disputes with Israel,” said George Giacaman, a Palestinian commentator, who teaches at Birzeit University in Ramallah.

The question, said Mr Giacaman, given the Israeli government’s vehement rejection of ending its settlement construction in East Jerusalem, is how far Washington is prepared to go to pressure Israel.

“It is an important test for the Obama administration, to see if it can bring about enough pressure to stop settlement building in East Jerusalem. I think the US will have to take some concrete action, and the extreme right-wing Israeli coalition will find it very hard to yield to any pressure on Jerusalem,” he added.

Mr Giacaman suggested that there is a “wide range” of areas the US could look at to put pressure on Israel, from refraining from vetoing UN Security Council resolutions on the Palestinian-Israeli conflict to downgrading some aspects of US-Israel relations.

The mere fact, however, that the Obama administration was willing to publicly challenge Israel on settlement building in Jerusalem suggested that the US had already prepared further steps to pressure Israel, said Hillel Schenker, an Israeli journalist.

“I believe that the US is going to make a very serious effort to move this process forward,” said Mr Schenker, referring to Palestinian-Israeli negotiations. In order to do that, he said, the US and the international community would have to be “forceful” with Israel and he expected that other international actors would now feel more “assertive” in light of the US position.

“I think this administration is resolved to pursue a very different approach [than] former administrations and I think it has a level of determination and sophistication that we haven’t seen before in dealing with domestic opposition from Congress and pro-Israel groups in the US,” Mr Schenker said.

By taking the public step of summoning the Israeli ambassador, the US administration would have been aware of the kind of opposition it would likely meet, both in Israel and domestically. This may signal that the White House is confident it can successfully pressure Israel on the issue of settlements, which also divides American supporters of Israel, and may expect the Israeli ruling coalition to either yield to US pressure or break apart.

One potential problem for the US strategy is that Israel’s biggest party, Kadima, which leads the Israeli opposition and which might step into a new governing coalition should the current one fall, is also opposed to linking the issue of East Jerusalem with occupied territory in general and would therefore also likely resist any attempt to halt settlement construction there.

Certainly Ehud Olmert, the former head of Kadima, was particularly active in sanctioning settlement construction in East Jerusalem, both in his tenure as prime minister and when he was mayor of Jerusalem.

Another problem is that with Israel firmly opposed to halting its settlement construction in East Jerusalem, Washington’s latest effort may only have the effect of instead spurring further construction as an act of defiance, thus forcing Washington to show its hand.

Should the Obama administration consider taking any practical steps to increase its pressure on Israel, it will be headed for a serious confrontation not only with Israel, but with the US Congress and the powerful and vocal pro-Israel lobbying groups in Washington.