Yellow cranes swivel in the winter sun on a hill in south-east Jerusalem; occasional bursts of drilling puncture the otherwise peaceful atmosphere.

In almost any other part of the world this scene would go largely unnoticed.

But for Israelis and Palestinians the issue of construction at Har Homa/Jabal Abu Ghneim has rapidly become a political battleground.

The Israeli government announced plans last month to build 300 new apartments at the Har Homa development in occupied East Jerusalem, drawing a furious diplomatic response from the Palestinians.

The row has dominated the first few weeks of the Annapolis process - a renewed US-sponsored attempt by the Israelis and Palestinians to end the conflict - and will be high on the agenda during US President George W Bush's visit to the region this week.

But why has the dispute become so heated?

Palestinian position

The main reason is that it goes to the heart of one of the key issues of this conflict - what territory will form the basis of any future Palestinian state.

 
Under almost every interpretation of international law, Har Homa - built in an area known in Arabic as Jabal Abu Ghneim just north of Bethlehem - is an illegal settlement, built on land Israel occupied during the 1967 Middle East War.

Critics accuse Israel of attempting to cut off East Jerusalem from the West Bank by building settlements for Jews only along the city's flank.

Palestinians say that under the Annapolis process Israel must freeze all settlement building.

But the Israeli side views the issue differently.

Israeli position

The Israeli authorities - like many ordinary Israeli citizens - refer to Har Homa as a "neighbourhood" (not a settlement) of Jerusalem and therefore not subject to any freeze.

Israel annexed East Jerusalem in 1967 as part of its "eternal indivisible" capital, though the move has not been recognised by almost the entire international community, including the US.

Israel intends any final agreement with Palestinians to leave the "neighbourhoods" of East Jerusalem in its hands, along with large Jewish settlement blocs in the West Bank.

Israeli Prime Minister Ehud Olmert referred to this as the "'67 plus" solution last week in an interview with the Israeli daily newspaper, the Jerusalem Post.

For the Palestinian team involved in the new process this position is unacceptable and they are calling for an immediate freeze to settlement construction.

Uncertain future

Some Palestinian political analysts are warning that the current Palestinian negotiating team is being "embarrassed" by the Har Homa issue.

"They have been making noises and protestations about this issue but it seems that they will continue negotiating," says political analyst George Giacaman.

"This will only weaken their position in the eyes of the Palestinian people."

Many residents in Har Homa seem unconcerned by the political storm centred on their homes.

Adi Schwertzberg, 27, said: "George Bush needs to know that a lot of people live here and it's our home. It's just like any other neighbourhood in Jerusalem."

But some Israeli estate agents are saying that people are becoming more reluctant to move to Har Homa.

Those trying to sell their homes were finding it more difficult because of the political controversy and uncertainty of Har Homa's future, said agent Aaron Bass.

President Bush will be expecting to hear a lot about Har Homa and Jabal Abu Ghneim during his first presidential visit to Israel and the occupied Palestinian territories, which starts on Wednesday.

He will be hoping to come up with a solution to the dispute, but it is unlikely to satisfy both sides.