The subject of Israeli colonies in the West Bank has been a sore point between the United States and Israel since Prime Minister Benjamin Netanyahu took office at the end of March.
Last week, another event rubbed salt in the wound. Washington summoned the Israeli ambassador, Michael Oren, to the State Department to tell him that a project to build 20 housing units in the Sheikh Jarrah neighbourhood in East Jerusalem should be halted.
The view of the US is that continued colonisation runs counter to the goal of a "two state solution" to the Israel-Palestinian conflict.
However, Netanyahu, hearing the request on Sunday, was not budging.
"We cannot accept the idea that Jews will not have the right to live or to build anywhere in East Jerusalem. We cannot accept such restrictions," Netanyahu said at the start of the Israeli weekly cabinet meeting on Sunday.
"Unified Jerusalem is the capital of the Jewish people and the state of Israel. Our sovereignty over it is unquestionable," he said, adding that the city's Palestinian residents could buy houses throughout the city.
The project, the prime minister has argued, is within Israel itself and is therefore not a new colony in the West Bank. Israel sees all of Jerusalem as its "eternal, undivided" capital and does not consider construction in East Jerusalem to be settlements.
This reasoning is in itself under dispute.
Israel captured East Jerusalem from Jordan in the Six-Day War of June 1967 and later annexed that part of the city in a move not recognised by the international community.
Israel’s minister for information and diaspora affairs, Yuli Edelstein, said: "A demand to cease construction in a neighbourhood situated only several metres from the Hebrew University proves how dangerous it is to be dragged into a debate on a settlement freeze, which will lead us to a total demand to freeze our normal lives throughout the entire state of Israel."
A symbol of the Arab community of East Jerusalem
The Palestinians want to make the east of the city the capital of their promised state, and vigorously oppose all settlement construction in East Jerusalem.
The building site is a symbol for the Arab community of East Jerusalem, and Sheikh Jarrah one of its most prestigious neighbourhoods.
The lot is located near Israeli government buildings and the British and US consulates, and was once owned by Jerusalem's leading Muslim cleric, the Grand Mufti Muhammad Amin al-Husseini, before World War II.
Israel seized the plot in 1968, and it was bought in 1985 by Irving Moskowitz, an American businessman.
Moskowitz has previously financed settlement projects in the occupied West Bank and East Jerusalem, including 133 lodgings in the heart of the Palestinian quarter of Ras al-Amud, a project which the United States opposed.
Israel's privately run Channel Two television reported that Moskowitz is financing another project, named Maale Zeitim, to build 69 extra homes in Ras al-Amud.
Some 300,000 settlers in the West Bank
Saeb Erakat, a principal Palestinian negotiator, said that it was "impossible" to back down on Israeli colonies in Jerusalem and the West Bank. "It must stop," he said.
The Palestinian Authority, he said, "strongly condemns Netanyahu's statements and considers it as an indication that his government challenges the will of the international community", adding that the Israeli government was responsible for blocking the peace process in the region.
The peace process foresees a total freeze on settlement in Palestinian territories and was already part of the "road map" plan in 2003.
Obama addressed the issue in his June 4 speech in Cairo.
"Israelis must acknowledge that just as Israel's right to exist cannot be denied, neither can Palestine's," said Obama. "The United States does not accept the legitimacy of continued Israeli settlements. This construction violates previous agreements and undermines efforts to achieve peace. It is time for these settlements to stop."
Today, 190,000 Israelis live in a dozen settlements in East Jerusalem, alongside 270,000 Palestinians. More than 3,000 Jewish homes are under construction in the Palestinian territories.
In March, Peace Now, a pacifist Israeli organisation, released a report claiming that the government’s plans for intensive building of settlements would nearly double the number of settlers in the West Bank over the next few years.
The report said the plans were for the building of 73,000 homes, 5,700 of which were to be in East Jerusalem.
An Israeli housing ministry spokesman, Eran Sidis, said that the figure referred "only to potential construction" and would yet need to be approved by various government bodies.
"In practice, only a very small part of these urbanism projects are implemented," said Sidis.
He claimed Peace Now "mixed together unrelated data," but he did not deny the existence of the project.
Nearly 300,000 Israelis have settled in the West Bank since its occupation in 1967.