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The U.S. State Department responded Thursday to remarks by Prime Minister Benjamin Netanyahu, who declared Israel would not stop building in East Jerusalem, saying that the status quo in the Middle East "is not sustainable."

Earlier Thursday, Netanyahu announced that Israel does not intend to comply with the American demand that it halt settlement construction in East Jerusalem.

"I am saying one thing. There will be no freeze in Jerusalem," Netanyahu said in an interview with Channel 2 television. "There should be no preconditions to talks," he added, referring to the Palestinian demand that Israel end all settlement construction before they would be willing to resume peace negotiations.

Netanyahu's comments were broadcast on Channel 2 TV shortly after special American envoy to the Middle East George Mitchell arrived in Israel for his first visit in six weeks. Mitchell's efforts had been on hold due to disagreements over East Jerusalem, the section of the holy city claimed by Israel and the Palestinians.

Although Netanyahu was repeating his long-standing position, the timing of the statement threatened to undermine Mitchell's latest efforts to restart peace talks. Mark Regev, an Israeli government spokesman, denied earlier reports that Israel had officially rejected an American demand for a settlement freeze in Jerusalem.

U.S. State Department Spokesman Philip J. Crowley issued a statement following the interview, saying that "we understand that the Israelis have a long-standing position, just as the secretary [Hillary Clinton] has said repeatedly, including in her speech to AIPAC, the status quo is not sustainable."

"Clearly we have asked both sides to take specific actions," Crowley continued. "That includes the Israelis as well, and this is part of our effort to continue our ongoing discussions on these specific issues. Both sides need to take responsibility and create the atmosphere to allow the process to move forward."

Earlier, in his interview with Channel 2, Netanyahu addressed Israel's apparently strained relationship with the U.S. of late, saying that "the United States doesn't agree with us on every detail. There are ups and downs, but we have a very strong relationship that helps us overcome these disagreements."

Addressing Iran's controversial nuclear program, which Israel views as a direct and existential threat against it, Netanyahu said that "I trust that [U.S. President Barack] Obama understands the Iranian problem. The true test to understanding the problem is a solution that everyone can abide by."

The prime minister voiced doubts that the United Nations can prevent Iran from obtaining nuclear weapons, saying that "I think that the U.S. can impose sanctions on Iran, not necessarily within the confines of the UN Security Council, because I doubt that the Security Council will ever do it."

"The independence of the Jewish people lies in our ability to protect ourselves," he added.

Earlier Thursday, The Prime Minister's Bureau responded to a Wall Street Journal report that Netanyahu's government had delivered over the weekend its most substantive response yet to the U.S. request.

Obama reportedly made the demand for an East Jerusalem construction freeze, along with other requests, in a tense White House meeting with Netanyahu on March 23.

Obama's administration had seen been awaiting Netanyahu's reply, while the latter had deliberated with his top ministers on possible confidence-building measures that would allow a revival of peace talks with the Palestinians.

According to the report in the Wall Street Journal, Netanyahu rejected the demand on East Jerusalem, but did agree to other confidence-building measures, such as allowing the opening of PA institutions in the eastern part of the city, transferring additional West Bank territory to Palestinian security control and agreeing to discuss all the core issues of the conflict during proximity talks with the PA, instead of insisting that these issues only be discussed in direct talks.

Palestinian negotiator Saeb Erekat called the Netanyahu position very unfortunate and said he hoped the U.S. would be able to convince the Israeli government to give peace a chance by halting settlement construction in East Jerusalem and elsewhere.

MK Oron: Netanyahu is worsening U.S.-Israel rift

Right-wing lawmakers on Thursday praised Netanyahu for refusing the Obama administration's demands to freeze construction in East Jerusalem, as their leftist rivals expressed fears that the move would worsen tensions between Israel and the United States.

"Netanyahu has said no to the peace process, aggravating the rift with the American administration," declared Meretz Chairman Haim Oron.

National Religious Party Chairman Daniel Herskovitz, however, lauded Netanyahu for his "appropriate Zionist response" to the ultimatum posed by Obama at the two leaders' meeting in Washington last month. "The future of Jerusalem cannot be subjected to an edict," Herskovitz declared.

Finance Minister Yuval Steinitz, a member of Netanyahu's Likud party, said that even the Americans know that "the true reason the peace process has frozen is due to the weakness and inability of the Palestinian leadership."

MK Ophir Ekonis declared that Netanyahu's response to Obama offered "further proof that the Likud is committed to the future of Jerusalem, and expresses a wide national agreement that the Jerusalem is the eternal capital of the Jewish people."

Israel, U.S. secretly working to bridge gaps in peace process

Israel and the United States have been conducting behind-the-scenes negotiations in recent days in an effort to find a formula that would bridge their differences over peace negotiations with the Palestinian Authority and America's demand that Israel halt construction in East Jerusalem for at least four months.

According to a senior Obama administration official, the top Middle East policy specialist at the White House, Dan Shapiro, arrived in Israel Wednesday on a secret visit. Shapiro's delegation also included David Hale, who serves as deputy to U.S. Middle East envoy George Mitchell and is permanently based in Israel.

Neither the White House nor the Prime Minister's Office have officially announced the talks or even Shapiro's arrival in Israel. Officially, total silence is being maintained, and the Prime Minister's Office therefore refused to comment Wednesday.

But a senior Israeli official said talks with American officials have been conducted throughout the past week - by phone, via the Israeli embassy in Washington and with the White House officials who arrived in Israel on Wednesday.

The dialogue between Israel and the Obama administration is to continue next week, when Defense Minister Ehud Barak visits Washington. Barak, who will leave for the U.S. on Sunday, is slated to deliver a speech at a conference sponsored by the American Jewish Committee, at which U.S. Secretary of State Hillary Clinton will also speak.

He will also hold meetings with U.S. National Security Adviser Gen. James Jones, Clinton and other senior officials. The talks will deal with the peace process and the effort to bridge the disagreements between the U.S. and Israel, as well as the Iranian nuclear issue and weapons smuggling from Syria to Lebanon.