JERUSALEM - Israel on Sunday rejected a U.S. demand to suspend a planned housing project in east Jerusalem, threatening to further complicate an unusually tense standoff with its strongest ally over settlement construction.
Israeli officials said the country's ambassador to Washington, Michael Oren, was summoned to the State Department over the weekend and told that a project made up of 20 apartments developed by an American millionaire should not go ahead.
Settlements built on captured lands claimed by the Palestinians have emerged as a major sticking point in relations between Israel and the Obama administration because of their potential to disrupt Mideast peacemaking.
Although Prime Minister Benjamin Netanyahu recently yielded to heavy U.S. pressure to endorse the establishment of a Palestinian state, he has resisted American demands for an immediate freeze on settlement expansion.
On Sunday, 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," Netanyahu declared, calling Israeli sovereignty over the entire city "indisputable."
"I can only imagine what would happen if someone suggested Jews could not live in certain neighbourhoods in New York, London, Paris or Rome. There would certainly be a major international outcry," Netanyahu said.
The international community considers Jewish neighbourhoods in east Jerusalem to be settlements and an obstacle to Israeli-Palestinian 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.
East Jerusalem is an especially volatile issue 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.
Speaking Sunday in New Delhi, U.S. Secretary of State Hillary Rodham Clinton said the administration was trying to reach an agreement with the Israelis on settlements. "The negotiations are intense. They are ongoing," she said.
Nearly 300,000 Israelis live in West Bank settlements, in addition to about 180,000 Israelis living in Jewish neighbourhoods in east Jerusalem.
The new Jerusalem project is being funded by Irving Moskowitz, a millionaire bingo magnate from Florida and supporter of Israeli settlement in east Jerusalem who has funded similar construction projects in the past. Moskowitz purchased the Shepherd Hotel in 1985 and plans to tear it down and build apartments in its place.
The approval, granted by the Jerusalem municipality earlier this month, allows for the construction of 20 apartments plus a three-level underground parking lot. The Jerusalem municipality issued a statement saying the purchase was legal.
Also at the Cabinet meeting, the head of Israel's Shin Bet internal security service, Yuval Diskin, said both the Western-backed administration of Palestinian President Mahmoud Abbas and the militant Islamic Hamas were carrying out "covert activity" in east Jerusalem to stop Jews acquiring property there.
An official present at the meeting, speaking on condition of anonymity in line with Cabinet rules, did not elaborate on what the activity entailed but quoted Diskin as saying that hardline Egyptian cleric Sheik Youssef al-Qaradawi earmarked $25 million to be funneled to Hamas activists in Jerusalem. Al-Qaradawi is a well-known figure in the Arab world and a regular on the satellite Al-Jazeera network.
Diskin told the Cabinet that the money was to be used by Hamas to buy apartments and plots of land and "build charitable institutions to broaden its base in the city," the official said. Diskin did not provide evidence. Israel considers Hamas a terrorist group and bars it from operating in Jerusalem.
Abbas aide Rafiq Husseini dismissed the report. "We wish there was Arab money to buy threatened houses," he told The Associated Press, "but that's not the case." Al-Qaradawi could no be reached for comment.
Palestinian negotiator Saeb Erekat said Jewish expansion in east Jerusalem jeopardizes peace efforts. The Palestinians have refused to restart peace talks until Israel halts all settlement expansion.
A spokesman for the U.S. Embassy had no immediate comment.
Peace talks are also hampered by the division among Palestinians. Abbas' government operates in the West Bank, while the Gaza Strip is ruled by Hamas.
Diskin, the Shin Bet chief, claimed that foreign nationals linked to the global jihad movement have infiltrated Gaza, according to the government official present at the meeting.
There had been "a steady trickle into Gaza of foreigners linked to global jihad," Diskin said. He did not elaborate or cite evidence, and the Shin Bet would not comment further.
Fathi Hamad, Hamas' interior minister in Gaza, dismissed Diskin's charge as "baseless propaganda."
"There is no al-Qaida or any other organization in Gaza," he said.
In an incident late Sunday, Israeli soldiers shot and wounded a Palestinian who was approaching the Gaza fence, the military said. The Palestinian was wearing a heavy coat on a hot day, raising suspicions, the military said, but he was not carrying weapons or explosives. Both sides later reported exchanges of fire in the area but no casualties.
Also late Sunday, Palestinians said a fuel smuggling tunnel from Egypt into Gaza blew up, killing one Palestinian and wounding several others. Palestinians use dozens of tunnels to smuggle goods into Gaza because of an Israeli and Egyptian blockade against the territory's Hamas rulers.
Associated Press writer Ibrahim Barzak contributed to this report from Gaza City, Gaza Strip.