It has been called the 'volcanic core' of the conflict and if there is ever to be peace between Palestinians and Israelis it will have to be made in the alleyways of this ancient city - holy to Jews, Christians and Muslims.

Jerusalem was first divided into east and west in 1948 when the state of Israel was created and then the east of the city was annexed by the Israelis in 1967 following war with its Arab neighbours.

Israel claims the city as its eternal undivided capital but the Palestinians believe that east Jerusalem is theirs and one day must become the capital of a Palestinian state.

My aim in coming here was to walk through the Holy Basin - the area of east Jerusalem outside the old city walls - to find out if Israel was trying to strengthen its claim to these Arab areas by changing the facts on the ground.

My first stop was Sheikh Jarrah to the north, recently targeted by Israeli settler groups. These religious nationalists believe they have a right to live in the ancient biblical area of Israel and have recently taken over several Palestinian houses. One hundred people from three extended families have been evicted and 26 more families are at risk of losing their homes.

Eviction orders

Under an olive tree, I met the Hanoun family as they watched settlers come and go from their house.

Last August, the family lost a 37 year legal battle when Israeli police threw them out at dawn. The settlers claimed through the courts they had owned the land but the Hanouns say they were given their properties in 1948 by the Jordanians - who controlled east Jerusalem - and the United Nations.

"The Israeli courts and police help the settlers," Maher Hanoun told me. "We are fighting not just a settlers' organisation but the whole government."

I walked on to the Mount of Olives and the Arab neighbourhood of Ras al-Amoud where one of the largest Jewish settlements is growing.

"In 10 years we hope to have 250 families here," said Arieh King, a settler. "Then we will be the majority in this area."

Mr King is a key figure in the drive to change the demographics of east Jerusalem. He digs in the archives, identifies houses owned by Jews before 1948 and gets relatives, often abroad, to lay claim to them.

At night, accompanied by Israeli soldiers, he serves eviction orders.

"I am at the heart of the struggle for Jerusalem, to prevent it from being divided," Mr King said. "My aim is to get Jews all over this area."

I walked on through ancient olives groves into Silwan - a poor and overcrowded Arab village beneath the old city walls.

Demolition threat

As I arrived, Israeli bulldozers were moving in to knock down buildings constructed, like many here, without planning permission.

A local activist, Jawad Siam, led me through the back streets to a scene of devastation.

Palestinians screamed and threw stones at impassive black-clad Israeli riot police standing in front of the massive machines as chunks of concrete rained down.

"This is ethnic cleansing in east Jerusalem," yelled Mr Siam. "By the most racist state in the world!"

He pointed out the only tall building in the area - a block where Israeli settlers live. It was built illegally and has a demolition order, yet it is still standing.

"The Israelis have a clear transfer agenda though they don't say it," said Mr Siam. "They want to get Palestinians out and bring in Israel families - Jewish settlers."

The threat of demolition also hangs over 88 houses in Silwan which are in the way of a proposed tourist park.

The Palestinians say they are being squeezed out of east Jerusalem with only 13% of land allocated for them to build on and nearly 60% earmarked for settlements and parks.

'Planning gaps'

Nearly 10 times more building permits are given to Jews in west Jerusalem than to Palestinians in the east of the city.

"You are right," said Nir Barkat, the Mayor of Jerusalem. "There are gaps in the planning system - both in east and west Jerusalem."

But he was adamant that the municipality had to act when houses were built illegally in what Israelis Jews consider to be parkland that has strategic importance in terms of the religious archaeology in the area.

Underneath Silwan, I trekked through the eerie tunnels of the City of David - one of Israel's most visited archaeological sites.

It is controversial because it is run by Elad, a settler organisation which has bought up around 60 Arab houses in the streets above.

"This place is a goldmine," Doron Spielman, from Elad explained. "The cornerstone of the archaeology of the Bible throughout the world."

The Palestinians accuse Elad of undermining them both by digging under their houses and emphasising only Jewish history here.

Mr Spielman said no Arab history had been unearthed at the site, although some archaeologists disagree.

"Israel is the sovereign entity here," said Mr Spielman. "And if we can enable more Jewish people to live here, more archaeology to become known here then I am proud of that."

The Israeli Cabinet has authorised the Jerusalem municipality to strengthen Israel's claim to east Jerusalem by building parks and trails which would link Jewish settlements and extend Israeli control over east Jerusalem.

My walk around the Holy Basin revealed how this is happening on the ground as settlers move in and archaeological sites and parks spread. The Israelis say Jerusalem is not negotiable - it must remain united - but the Palestinians will only take part in peace talks if east Jerusalem is part of the deal. A solution seems as far away as ever.