WASHINGTON — An ill-timed municipal housing announcement in Jerusalem has mutated into one of the most serious conflicts between the United States and Israel in two decades, leaving a politically embarrassed Israeli government scrambling to respond to a tough list of demands by the Obama administration.

The Obama administration has put Prime Minister Benjamin Netanyahu in a difficult political spot at home by insisting that the Israeli government halt a plan to build housing units in East Jerusalem. The administration also wants Mr. Netanyahu to commit to substantive negotiations with the Palestinians, after more than a year in which the peace process has been moribund.

With the administration’s special envoy, George J. Mitchell, suddenly delaying his planned trip to Israel, the administration was expecting a call from Mr. Netanyahu, after a tense exchange last week with Secretary of State Hillary Rodham Clinton.

On Monday, however, Mr. Netanyahu sounded a defiant note, telling the Israeli Parliament that construction of Jewish housing in Jerusalem was not a matter for negotiation.

He is struggling to balance an increasingly unhappy ally in Washington with the restive right wing of his coalition government.

The prospects for peace in the Middle East seemed murkier than ever, as a year’s worth of frustration on the part of President Obama and his aides seemed to boil over in its furious response to the housing announcement, which spoiled a visit to Israel by Vice President Joseph R. Biden Jr.

“What happened to the vice president in Israel was unprecedented,” said a senior administration official, who spoke on the condition of anonymity. “Where it goes from here depends on the Israelis.”

But the diplomatic standoff also has repercussions for the Obama administration. Its blunt criticism of Israel — delivered publicly by Mrs. Clinton in two television interviews on Friday and reiterated Sunday by Mr. Obama’s political adviser, David Axelrod — has set off a storm in Washington, with pro-Israel groups and several prominent lawmakers criticizing the administration for unfairly singling out a staunch American ally.

“Let’s cut the family fighting,” said Senator Joseph I. Lieberman, independent of Connecticut. “It’s unnecessary; it’s destructive of our shared national interest. It’s time to lower voices, to get over the family feud between the U.S. and Israel. It just doesn’t serve anybody’s interests but our enemies’.”

Relations between Israel and the United States have been uneasy ever since Mr. Obama took office with a plan to rekindle the peace process by coupling a demand for a full freeze in Jewish settlement construction with reciprocal confidence-building gestures by Arab countries.

Neither happened, and Mr. Obama, who is not as popular in Israel as he is elsewhere around the world, was forced last September to make do with Mr. Netanyahu’s offer of a 10-month partial moratorium on settlements in the West Bank. But the president was outraged by the announcement of 1,600 housing units in an ultra-Orthodox neighborhood in East Jerusalem during Mr. Biden’s visit, administration officials said.

Mr. Obama was deeply involved in the strategy and planning for Mr. Biden’s visit and orchestrated the response from Mr. Biden and Mrs. Clinton after it went awry, these officials said.

The administration has used language intended to telegraph anger, defining the dispute not only in terms of the damage it could cause to the peace process but to the American relationship with Israel.

“That is a whole different order of magnitude of importance,” said Daniel Levy, a former peace negotiator who is senior fellow and head of the Middle East Initiative at the New America Foundation, a research group.

The last time relations between the United States and Israel became this strained, analysts said, was when James A. Baker, then secretary of state, clashed with the Israeli government in the early 1990s, also over settlement policy. The United States ended up withholding loan guarantees from Israel for a time.

Mr. Netanyahu said the announcement of the housing development had surprised even him, and he apologized for its timing. But Mr. Obama feels that Mr. Netanyahu should have been in clearer control of the construction process and that he should have done what was needed to stop it, according to officials in Jerusalem and Washington.

There is a feeling among officials in Washington that the Netanyahu government does not fully grasp how angry Obama officials have grown. But there are signs that it is sinking in.

The Israeli ambassador in Washington, Michael B. Oren, used the word “crisis” about his country’s relations with Washington for the first time since taking up his job last year, in a telephone briefing to colleagues over the weekend, according to an Israeli official.

Still, American and Israeli officials also made clear that the core security issues binding the two countries were not in jeopardy, and that what was happening was closer to a married couple having a bad fight rather than seeking a divorce.

In the murky vocabulary of diplomacy, the scheduled talks due to start under American supervision are viewed by the Israelis mostly as “proximity” discussions, in other words procedural talks rather than substantive negotiations. But the Palestinians want the discussions to be as substantive as possible, an approach Mrs. Clinton demanded in her call to Mr. Netanyahu on Friday.

The Israeli leader has said he is open to direct negotiations with the Palestinians. But the chief Palestinian negotiator, Saeb Erekat, said in an interview in his Ramallah office that the Palestinians and Israelis had exhausted direct negotiations and that it was time for America to take a more direct role. “We have a trust level below zero between the two sides,” he said.

The settlement episode has enabled the administration to turn the tables on Mr. Netanyahu, some analysts say. But the question is whether it will be able to extract more concessions from him now.

“The heart of the matter is whether the proximity talks are going to be productive, in the sense of opening a corridor to direct negotiations that will lead to a peace agreement,” said Martin Indyk, a former American ambassador to Israel.

The timing of the dispute could not be more awkward for the administration, coming a week before the American Israel Public Affairs Committee, the most influential pro-Israel lobbying group, meets in Washington. Mr. Netanyahu and Mrs. Clinton are both scheduled to speak to the group, which has condemned the White House’s tough stance.

Mr. Biden may meet with Mr. Netanyahu while he is here, officials said. But there is no meeting planned between Mr. Obama and Mr. Netanyahu because the president will be traveling in Indonesia and Australia, a conflict which one official joked suits the administration well right now. “This may not be the best time for a face-to-face,” he said.

Mark Landler reported from Washington, and Ethan Bronner from Jerusalem. Helene Cooper contributed reporting from Washington.