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Israel's ambassador to the United States, Michael Oren, has told the country's diplomats there that U.S.-Israeli relations face their worst crisis in 35 years, despite attempts by Prime Minister Benjamin Netanyahu's office to project a sense of "business as usual."

Oren was speaking to the Israeli consuls general in a conference call on Saturday night.

Netanyahu consulted Sunday with the forum of seven senior cabinet ministers over a list of demands that U.S. Secretary of State Hillary Clinton made in a telephone conversation Friday.

Clinton harshly criticized the announcement last week of plans to expand the Ramat Shlomo neighborhood in East Jerusalem while U.S. Vice President Joe Biden was visiting Israel.

Haaretz has learned that Clinton's list includes at least four steps the United States expects Netanyahu to carry out to restore confidence in bilateral relations and permit the resumption of peace talks with the Palestinians.

1. Investigate the process that led to the announcement of the Ramat Shlomo construction plans in the middle of Biden's visit. The Americans seek an official response from Israel on whether this was a bureaucratic mistake or a deliberate act carried out for political reasons. Already on Saturday night, Netanyahu announced the convening of a committee to look into the issue.

2. Reverse the decision by the Jerusalem District Planning and Building Committee to approve construction of 1,600 new housing units in Ramat Shlomo.

3. Make a substantial gesture toward the Palestinians enabling the renewal of peace talks. The Americans suggested that hundreds of Palestinian prisoners be released, that the Israel Defense Forces withdraw from additional areas of the West Bank and transfer them to Palestinian control, that the siege of the Gaza Strip be eased and further roadblocks in the West Bank be removed.

4. Issue an official declaration that the talks with the Palestinians, even indirect talks, will deal with all the conflict's core issues - borders, refugees, Jerusalem, security arrangements, water and settlements.

Two advisers of the prime minister, Yitzhak Molcho and Ron Dermer, held marathon talks Sunday with senior White House officials in Washington and U.S. Mideast envoy George Mitchell and his staff to try to calm the situation. Mitchell will return to Israel Tuesday and expects to hear if Netanyahu intends to take the proposed steps.

At the beginning of Sunday's cabinet meeting, Netanyahu tried to convey a message that there was no crisis in relations with the United States. But he sent precisely the opposite message to Oren in Washington.

In Oren's Saturday conference call with the Israeli consuls general, he said that the current crisis was the most serious with the Americans since a confrontation between Henry Kissinger and Yitzhak Rabin in 1975 over an American demand for a partial withdrawal from the Sinai Peninsula.

At Sunday's cabinet meeting, Netanyahu said the matter had been blown out of proportion by the media. He added: "There was an unfortunate incident here that was innocently committed and was hurtful, and certainly should not have occurred."

He said steps would be taken to prevent such cases in the future. "It is extremely important to understand that the State of Israel and the United States have common interests," he said, adding that those interests "also require us to take decisions to change the situation in the country."

Four consuls discussed the conference call with Haaretz. Some noted that in previous conference calls with Oren, the ambassador took pains to make clear that relations with the United States were excellent. This time, however, Oren sounded extremely tense and pessimistic. Oren was quoted as saying that "the crisis was very serious and we are facing a very difficult period in relations [between the two countries]."

Oren told the consuls to lobby congressmen, Jewish community leaders and the media to convey Israel's position. He said the message to be relayed was that Israel had no intention to cause offense to Vice President Biden and that the matter had stemmed from actions by junior bureaucrats in the Interior Ministry and was caused by a lack of coordination between government offices. "It should be stressed that [our] relations with the United States are very important to us," Oren reportedly said.

Several of the consuls suggested waiting, but Oren hinted that his approach reflected Netanyahu's wishes. "These instructions come from the highest level in Jerusalem," he was quoted as saying, adding that the utmost must be done to calm matters.

Oren told participants in the conference call of a meeting he was summoned to on Friday with Deputy Secretary of State James Steinberg for a reprimand. Oren spoke of his surprise at being summoned after believing that the crisis had ended on Thursday.

"Steinberg read to me from the [American] letter of protest, whose content was extremely harsh," Oren reportedly said. Despite several requests for a reaction from the embassy, no response was forthcoming at press time.