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Palestinian Authority President Mahmoud Abbas on Sunday accused Israel of destroying the Islamic and Christian character of Jerusalem, following Prime Minister Benjamin Netanyahu's rejection of a U.S. demand to halt a proposed housing project in East Jerusalem.

"The holy city is today facing real dangers, while there are attempts to turn it into a full Jewish city by changing its Islamic and Christian landmarks," a statement published Monday by the official Wafa news agency quoted Abbas as telling Palestinians in Bethlehem.

He accused Israel of "digging under every corner in the city, which would cause a real danger to its historic and religious constructions, mainly the al-Aqsa Mosque."

And, he said, Israel's policy "of demolishing houses or confiscating them, as well as imposing heavy taxes on its Muslim and Christian residents and preventing them from building, aims at forcing them to leave the city."

Israel captured Arab East Jerusalem from Jordan in the 1967 Six-Day War, and annexed it shortly afterwards.

Palestinians however want East Jerusalem to be the capital of their future state, and say the Jewish neighborhoods Israel has built there cut the city off from the rest of the West Bank.

On Sunday Israeli media reported that the U.S. has demanded Israel not proceed with a plan to build housing units on the site of the Shepherd Hotel, in the Sheikh Jarrah neighborhood of East Jerusalem.

The hotel had been bought in the mid-1980s by US businessman Irving Moscowitz, a supporter of Israeli settlements in the West Bank.

Netanyahu responded to the U.S. demand by telling his cabinet that Israel "cannot accept the idea that Jews will not have the right to live and purchase in all parts of Jerusalem."