Foreign Minister Avigdor Lieberman has ordered diplomats to use an old photograph of a former Palestinian religious leader meeting Adolf Hitler to counter world criticism of a Jewish building plan for East Jerusalem.

Israeli officials said on Wednesday that Lieberman told Israeli ambassadors to circulate the 1941 shot in Berlin of the Nazi leader seated next to Haj Amin al-Husseini, the late mufti or top Muslim religious leader in Jerusalem.

One official said Lieberman, an ultranationalist, hoped the photo would "embarrass" Western countries into ceasing to demand that Israel halt the project on land owned by the mufti's family in a predominantly Arab neighbourhood in East Jerusalem.

Israel captured East Jerusalem during the 1967 Six-Day War, annexing it as part of its internationally unrecognised claim to Jerusalem as its capital.

Some diplomats opposed Lieberman's move, arguing it could earn Israel stiffer world criticism for seeming to sidestep the wider conflict it faces with the Palestinians who want East Jerusalem as capital of a future state, another official said.

Asked why Lieberman issued the order, a spokesman said: "because it's important for the world to know the facts" and would not elaborate.

The United States and Europe this week protested the plan by private Israeli developers to build 20 apartments on the land which Israel says was bought by an American-Jewish millionaire as well as Israel's threats to demolish Palestinian homes that could leave thousands homeless.

The controversy has complicated an Israeli rift with the U.S. over its refusal to meet President Barack Obama's demands to halt settlement building throughout the West Bank so that stalled peace talks may resume.

About half a million Israelis live in the settlements built in the West Bank and East Jerusalem, areas that are home to some three million Palestinians.

An official in Palestinian President Mahmoud Abbas's government accused Lieberman of "political bankruptcy" in ordering the distribution of the Husseini-Hitler photograph.

"It's an old story that has its own circumstances and doesn't apply to the present," said Adnan al-Husseini, the Palestinian Authority-appointed governor of Jerusalem, and a relative of the late mufti.

The Yad Vashem Holocaust Memorial in Jerusalem said said Husseini supported Nazi Germany to try to win backing for Arab nationalistic goals and that he lobbied for the extermination of Jews in North Africa and Palestine.