‘I will not cave in” announced the Israeli prime minister Benjamin Netanyahu, “since this is a matter of 20 units only.” Mr Netanyahu’s curt response to the US government’s demand that Israel discontinue plans to build 20 apartments for Jewish settlers in Palestinian East Jerusalem underscores how this dispute has touched a nerve, and is of far greater significance than “20 units only”.

That an American president is holding Israel to the requirements of the United Nations, rejecting Israeli settlements in the West Bank and now in East Jerusalem as contravening international law, must frustrate Mr Netanyahu. That in doing so the US president appears ready to tackle the influence of Irving Moskowitz, the Jewish American who owns the property the Israelis intend to occupy in East Jerusalem, must be particularly galling. Mr Moskowitz has been an important ally for Mr Netanyahu, and his “charity” bingo hall in Southern California has buoyed the settler movement, funnelling millions of dollars to radical Israeli groups.

In demanding that this settlement stop, the US government has also made its position clearer on the status of Jerusalem. Mr Netanyahu complains that Israel’s sovereignty over the city is being challenged, but that is precisely the point. The Knesset’s declaration in 1980 that Jerusalem remain “complete and united” under Israeli control does not appear to hold sway over Mr Obama. Instead he appears to side with the overwhelming majority of international opinion that rejects this view.

Since Israel’s annexation of East Jerusalem and territories in the West Bank in 1967, six binding UN security council resolutions have declared settlement activity illegal, and the development of territory acquired in war is a clear breach of international law. Israel seems to care about neither, and while successive American administrations have been critical in public, in private they have backed down in the face of Israeli intransigence. Barack Obama has vowed that the American position will be the same in public as it is in private. The US president is making good on that commitment, and appears determined not to allow internal Israeli disputes and radical movements to define what is possible.

Mr Moskowitz is one such radical who has had an undue influence on Israel. As a businessman, his success cannot be disputed. But his politics, and the loopholes in American law that allow him to support fringe Israeli groups – including the annual Zionism award of $150,000 he has given to figures who have advocated the removal of Arabs from the Palestinian territories – have done little to further the interests of peace. Haim Dov Beliak, a rabbi in Southern California who has led a movement against Mr Moskowitz’s lucrative bingo parlour and its use to finance right-wing Israeli groups, has long criticised the double standards that must end if the US is to be an honest broker: “How is it that you close Muslim charities, one right after the other, without any due process, when Moskowitz’s foundations are allowed to run unchallenged?”

When Mr Obama welcomed American-Jewish leaders to the White House last week he reaffirmed the US commitment to Israel, but also the belief that a two-state solution would require Israel “to engage in serious self-reflection”. For his part, Mr Obama has shown how serious reflection can lead to changes in policy. He cannot make peace without partners on both the Arab and Israeli sides who are willing to make painful sacrifices. But he could address one obstacle that is rather closer to home.