The controversy surrounding the plan to create a Jewish enclave in the heart of the Palestinian neighborhood of Sheikh Jarrah in East Jerusalem is not another routine expression of the U.S.-Israel dispute over the settlements. The timing of the decision to build dozens of housing units in the Shepherd Hotel complex, at the height of efforts to reach an agreement on limited construction in the settlements, casts doubt over Prime Minister Benjamin Netanyahu's willingness to enter serious negotiations on a final-status agreement. The support he granted the construction project yesterday, despite the vehement condemnations of America and Britain, show he is prepared to endanger Israel's most essential foreign relations for a provocative initiative led by Irving Moskowitz, the patron of right-wing organizations in East Jerusalem.

U.S. President Barack Obama's opposition should not have surprised Netanyahu. The day after Jerusalem Day, when the prime minister declared the city is "Israel's united capital" and would remain forever under Israeli sovereignty, Washington clarified that authority over East Jerusalem would be resolved only through negotiations on a final-status agreement.

Netanyahu's agreement to hold talks based on the principle of "two states for two peoples" must also include readiness to discuss Sheikh Jarrah. Jerusalem is one of the most sensitive issues in the Israeli-Arab conflict. Arab states cannot be expected to normalize relations with Israel while the latter embarrasses them with construction projects in East Jerusalem.
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Particularly infuriating is the government's claim that Israel is allowing the Arabs of East Jerusalem to settle in Jewish neighborhoods. Unlike Jewish right-wing organizations - which work to settle Jews in, and take control of, the eastern part of the city - Palestinian residents look to the Jewish areas due to a lack of housing and public services in their own neighborhoods. Since 1967 Israel has expropriated 35 percent of East Jerusalem in order to construct 50,000 housing units in neighborhoods intended primarily for Jews. During the same period, fewer than 600 housing units were built for Palestinian residents with government support.

Construction for Jews in East Jerusalem is inflicting tremendous diplomatic damage on Israel. Netanyahu and Jerusalem mayor Nir Barkat are playing with fire under the transparent cover of "normal authorization for private construction." Freezing construction at Shepherd Hotel is no less essential than evacuating the outposts and freezing settlement construction beyond the capital's municipal area.