Israel's right-wing government has reacted angrily to fresh American criticism of Jewish settlements.
Prime Minister Benjamin Netanyahu has rejected a demand by the United States to halt a project to build apartments for Jews in disputed East Jerusalem.
"United Jerusalem is the capital of the Jewish people and the State of Israel," Mr. Netanyahu told the Cabinet, and he said, "Israeli sovereignty in the city is indisputable."
The Prime Minister spoke after Israel's ambassador to Washington was summoned to the State Department and told that an East Jerusalem project financed by an American millionaire must be stopped.
Mr. Netanyahu said Jews are entitled to live anywhere in Jerusalem. He said it would be an international scandal if Jews were not allowed to live in certain neighborhoods of New York, London or Paris, and the same should apply to Jerusalem.
But the Palestinians claim East Jerusalem as the capital of their future state, and the United States sees Israeli construction in the area as an obstacle to peace.
Palestinian negotiator Saeb Erekat:
"The job of the Israeli Prime Minster should be to prepare his people for what it takes to make peace," Erekat said. "He knows very much that there will never be peace between Palestinians and Israelis without East Jerusalem being the capital of the Palestinian state."
The settlement issue has created a deepening rift between Israel and Washington, since Mr. Netanyahu's nationalist government took power three months ago. Israel wants to mend fences with its closest ally, but officials here say Jerusalem is a red line.