The United States views East Jerusalem as no different than an illegal West Bank outpost with regard to its demand for a freeze on settlement construction, American sources have informed both Israel and the Palestinian Authority.

This clarification came in the context of a growing crisis in U.S.-Israel relations over the planned construction of some 20 apartments for Jews in the Shepherd Hotel, in East Jerusalem's Sheikh Jarrah neighborhood. The U.S. has demanded that the project be halted, but Prime Minister Benjamin Netanyahu told the cabinet meeting Sunday that "Israel will not agree to edicts of this kind in East Jerusalem."

"United Jerusalem is the capital of the Jewish people in the State of Israel, and our sovereignty over the city is not subject to appeal," he continued. "Our policy is that Jerusalem residents can purchase apartments anywhere in the city. This has been the policy of all Israeli governments. There is no ban on Arabs buying apartments in the west of the city, and there is no ban on Jews building or buying in the city's east. This is the policy of an open city."

Saying that Israel could not accept Jews being forbidden to live in anywhere in Jerusalem, Netanyahu added: "I can imagine what would happen if someone proposed that Jews could not live or buy in certain neighborhoods of London, New York, Paris or Rome. A huge international outcry would surely ensue. It is even more impossible to agree to such an edict in East Jerusalem."

Asked to comment on these remarks, U.S. Secretary of State Hillary Clinton, who was in New Delhi, said the administration is trying to reach an agreement with Israel on settlements, and "the negotiations are intense," the Associated Press reported.

Later Sunday, Netanyahu met with his advisors to discuss Israel's response to Washington's demand.

"I was surprised by the American demand," a source present at the meeting quoted him as saying. "In my conversation with [U.S. President Barack] Obama in Washington, I told him I could not accept any restrictions on our sovereignty in Jerusalem. I told him Jerusalem is not a settlement, and there is nothing to discuss about a freeze there."

"In my previous term [as premier], I built thousands of apartments in the Har Homa neighborhood of Jerusalem, defying the entire world," Netanyahu added. "Therefore, it is clear that I will not capitulate in this case - especially when we are talking about a mere 20 apartments."

Other ministers also criticized the American stance at the cabinet meeting. Foreign Minister Avigdor Lieberman, for instance, termed it "puzzling," while Interior Minister and Shas Chairman Eli Yishai declared that "no agency in the world can stop construction in Jerusalem."

And Shin Bet security service chief Yuval Diskin told the ministers that the PA and its security services are engaged in widespread efforts to keep Palestinians from selling land in Jerusalem to Jews. He also said that Sheikh Yusuf Qaradawi of Qatar has allocated $21 million to Hamas activists to buy buildings and establish infrastructure in Jerusalem.

Washington's objections to the Shepherd Hotel project were first voiced by senior State Department officials at a meeting with Israeli Ambassador Michael Oren last Thursday, in response to a request by PA President Mahmoud Abbas. The officials complained that the construction would change the neighborhood's demographic balance and harm its Palestinian residents.

Oren responded that the land in question was privately owned, having been purchased in 1985 by American Jewish tycoon Irving Moskowitz, and the project has received all the necessary permits from the Jerusalem municipality.

Also Sunday, Abbas' bureau chief, Rafiq Husseini, said he hoped the U.S. would not back down on its demand for a complete settlement freeze, including in East Jerusalem.

In an interview with the Nazareth-based radio station A-Shams, Husseini said, "from our standpoint, there is no room for a compromise [on this issue], and we expect the American administration to stick to the determined stance that envoy [George] Mitchell expressed as far back as 2001. Any compromise that enables continued construction ... will do nothing whatsoever to advance the diplomatic process."