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The Jerusalem municipality has given final approval to a settler group for the construction of 20 apartments next to the controversial Shepherd Hotel in East Jerusalem's Sheikh Jarrah neighborhood, Haaretz learned yesterday.

The announcement came hours before Prime Minister Benjamin Netanyahu was to meet in Washington with President Barack Obama, seeking to bring a public end to the crisis between the two allies over Jewish construction in East Jerusalem.

Netanyahu's meeting with Obama took place close to midnight Israel time, and was described as private, involving only the two leaders.

The Shepherd Hotel in Sheikh Jarrah was purchased by American Jewish tycoon Irving Moskowitz in 1985 for $1 million. Moskowitz is an influential supporter of the Ateret Cohanim association and Israeli settlement in East Jerusalem.

An existing structure in the area will be razed to make room for the new housing, while the historic Shepherd Hotel will remain intact. A three-story parking structure and an access road will also be constructed.

The local planning council initially approved the plan in July, a move that angered Britain and the United States and prompted them to call on Israel to cancel the plans. The council issued its final approval for the project last Thursday, which permits the settlers to begin construction at once.

Netanyahu's visit to Washington this week was aimed at defusing the crisis that began when the report broke of plans to build 1,600 new housing units in Ramat Shlomo in East Jerusalem two weeks ago during the visit here of U.S. Vice President Joe Biden.

While Netanyahu distanced himself from the Interior Ministry decision, he had reiterated prior to and during his trip that Israel reserves the right to build in East Jerusalem.

The prime minister, who had hoped to rebuild lost trust in his relations with the president, said that "relations between Israel and the U.S. should not be risked over divisions on the matter of Jerusalem."

Despite efforts by both Israel and America to end the crisis, there is still lingering tension and a lack of trust toward the prime minister.

An Israeli source who had discussed the matter with senior administration officials said Secretary of State Hillary Clinton and the president are dissatisfied with Netanyahu's letter detailing the steps he is willing to take to restore the administration's confidence in him.

The prime minister and his aides said Monday's meeting with Clinton and Vice President Joe Biden, which served as a preamble to the meeting with Obama last night, was conducted in excellent spirits.

However, the Israeli source noted that both Biden and Clinton used strong language and made it clear to Netanyahu what he needs to tell the president if trust is to be restored.

The same source said that for the Americans, Netanyahu's answers were insufficient. An American source close to the administration said that Obama and Clinton will "test" Netanyahu to see whether he will carry out his promised goodwill gestures toward the Palestinians.