The United States believes that unilateral moves on the part of either Israel or the Palestinians could prejudice the result of final status negotiations, the State Department said on Monday.
State Department spokesman P.J. Crowley said the U.S. has made clear to Israel that it views construction in East Jerusalem with the same opposition that it has for settlement activity in the West Bank.
"This is not a new issue, those issues came up a number of times," Crowley said, confirming that a construction project in East Jerusalem had been a topic of conversation last week during a meeting between senior U.S. diplomats and Israeli Ambassador Michael Oren.
"We've made our views known to Israel. This kind of construction is a type of issues that should be subject to permanent-status negotiations," Crowley said, adding: "We are concerned that unilateral actions taken by the Israelis or the Palestinians cannot prejudge the outcome of these negotiations."
U.S. officials said Oren met with Deputy Secretary of State for Management Jacob Lew, who told him that Washington was troubled by the project in East Jerusalem's Sheikh Jarrah neighborhood, which would see 20 apartments developed by American millionaire Irving Mokowitz.
The spat emerged publicly on Sunday when Netanyahu told his cabinet there would be no limits on Jewish construction anywhere in unified Jerusalem.
"We cannot accept the fact that Jews wouldn't be entitled to live and buy anywhere in Jerusalem, he said, calling Israeli sovereignty over the entire city indisputable.
American sources have informed both Israel and the Palestinian Authority that the United States views East Jerusalem as no different from an illegal West Bank outpost with regard to its demand for a freeze on settlement construction.
The special U.S. envoy for Middle East peace, George Mitchell, will departs for the region this week amid these new signs of tension between the U.S. and Israeli governments over settlement construction.
Mitchell, a former U.S. senator, plans to visit Israel, the Palestinian territories and several neighboring countries, including Bahrain. His itinerary was still being worked out Monday.
He will head for the region as the administration tries to build Arab support for a resumption in Israeli-Palestinian peace talks, a mission complicated by American divisions with Prime Minister Benjamin Netanyahu on settlements.
Dissension flared anew over the weekend when Netanyahu rejected a U.S. demand to suspend a planned housing project in east Jerusalem.
The international community considers Jewish neighborhoods in East Jerusalem to be settlements and an obstacle to peacemaking because they complicate a possible division of the city. Israel does not regard them as settlements because it annexed east Jerusalem after capturing the area in 1967. The annexation has not been recognized internationally.
Settlements on captured lands claimed by the Palestinians are a major sticking point in relations between Israel and the Obama administration. Nearly 300,000 Israelis live in West Bank settlements, in addition to about 180,000 Israelis living in Jewish neighborhoods in East Jerusalem.
East Jerusalem is an especially volatile because it is the site of key Jewish, Christian and Muslim holy sites. The Palestinians want the traditionally Arab sector of the city to be the capital of their future state. The Palestinians have refused to restart peace talks until Israel halts all settlement expansion.
Mitchell has been attempting to negotiate a deal under which Israel would at least temporarily freeze settlement activity in a bid to bring the Palestinians to the table and attract Arab concessions toward Israel.
Several options have been discussed, including a six-month freeze that would allow Israel to finish construction on some settlement projects that have already been contracted, but officials say no deal has yet been struck.
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