Prime Minister Benjamin Netanyahu rejected Sunday an American call to hold off on a planned Jewish housing development in East Jerusalem, saying Israel’s sovereignty over the disputed city could not be challenged.

Mr. Netanyahu issued the statement because State Department officials had raised concerns over the project with Israel’s new ambassador to Washington, Michael Oren, during discussions last week on a range of issues. The American officials suggested that going ahead with the development now would cause problems in negotiations toward a two-state solution to the Israeli-Palestinian conflict.

“I would like to re-emphasize that united Jerusalem is the capital of the Jewish people and of the State of Israel,” Mr. Netanyahu said. “Our sovereignty over it cannot be challenged; this means — inter alia — that residents of Jerusalem may purchase apartments in all parts of the city.”

Israeli officials, speaking on condition of anonymity because of the delicacy of the matter, said the Netanyahu government had gone public with the issue to try to pre-empt further American efforts to stop Jewish building in East Jerusalem. Mr. Netanyahu noted in his statement that there were Arabs living in the predominantly Jewish western part of the city, adding, “We cannot accept the idea that Jews will not have the right to live and purchase in all parts of Jerusalem.”

Israel captured the eastern part of Jerusalem and the West Bank from Jordan in the 1967 Six-Day war. It annexed East Jerusalem, which contains sites holy to Jews, Christians and Muslims, as well as many Palestinian neighborhoods, and built a series of Jewish neighborhoods in and around it to solidify its claim. It has also built scores of West Bank settlements.

As Washington seeks to help create a Palestinian state, it has challenged Jewish settlements in both areas and demanded a freeze on further building. Israel has been seeking a compromise. The Obama administration’s Middle East envoy, George J. Mitchell, is expected here in a week for more meetings on the issue.

The East Jerusalem property in question, to be developed into a 20-unit complex, was bought by a Miami-based businessman, Irving Moskowitz, in 1985. He has long supported Israeli and Jewish housing in East Jerusalem. From 1987 to 2002, he rented the existing building there to the paramilitary border police. Recently the municipality granted permission for the housing development to proceed.

The property is in the neighborhood of Sheikh Jarrah, a predominantly Palestinian area that also has foreign consulates and Israeli government buildings.

At Sunday’s weekly cabinet meeting, the head of the Shin Bet security services, Yuval Diskin, said that Hamas, the Islamist movement that rules in Gaza and opposes Israel’s existence, has been buying property in East Jerusalem and broadening its base here and that the Palestinian Authority had set up an intelligence network aimed at preventing Palestinians from selling their property to Israelis.

The chief Palestinian negotiator, Saeb Erekat, told Israel Radio that instead of defending the Moskowitz development, Mr. Netanyahu should be preparing Israel to make peace. “He knows very well that there will never be peace between Palestinians and Israelis without East Jerusalem being the capital of the Palestinian state,” Mr. Erekat said.