Palestinian aspirations to establish a capital in East Jerusalem are unwavering, despite this week's announcement by Israel that it is expanding Jewish neighbourhoods in the eastern half of the city.

The former Palestinian prime minister Ahmed Qureia, now the Palestinian Authority's Minister for Jerusalem Affairs, has told the Herald that Jerusalem is integral to Palestinian sovereignty.

''This is non-negotiable; we will not accept anything less than Jerusalem as the capital of Palestine,'' Mr Qureia said.

''This fact has been recognised by previous Israeli prime ministers, such as Ehud Barak and Ehud Olmert. [The Israeli opposition leader Tzipi] Livni has said that it must be on the table, but this government of [Prime Minister Benjamin] Netanyahu doesn't want to talk about it because it doesn't want peace.''

Mr Qureia, also known as Abu Alla, described this week's decision by Israel to approve another 900 housing units in Gilo - a settlement of about 40,000 Jewish families built on land annexed by Israel after the 1967 Six Day War - as severely damaging to attempts to restart the peace process.

''It's another nail in the coffin of the peace process,'' Mr Qureia said. ''How can there be two states, for two peoples, if the Israelis refuse to stop building on Palestinian land and continue to ignore international law?''

The world does not recognise Israel's annexation of East Jerusalem and considers it occupied territory.

The US President, Barack Obama, sharply criticised the new development plans this week, saying he thought it would make it difficult for Israel to make peace with its neighbours.

In May Mr Obama demanded Israel cease settlement construction in East Jerusalem and the West Bank as a step towards resuming peace talks between Israel and the Palestinians.

But Mr Netanyahu steadfastly rejected the demand, asserting Israel's right to maintain Jerusalem as an ''undivided capital''.

The prospect of dividing Jerusalem remains hugely contentious among most Israelis who regard the city as the eternal capital of the Jewish people.

After the establishment of the state of Israel in 1948, until June 1967, Israel ruled over only the western half of Jerusalem.

But following the Six Day War Israel captured the eastern half of the city from Jordan, giving Jews access to the western retaining wall of the Temple Mount, the site of the first and second Jewish temples and regarded as the holiest site in Judaism.

Israel declared its annexation of East Jerusalem in 1980, building a ring of Jewish neighbourhoods from north to south around the Old City aimed at making the return of the city to its 1967 boundaries almost impossible.

Today East Jerusalem is home to about 200,000 Jews and 250,000 Palestinians; most of the latter hold Jerusalem residency permits but not Israeli citizenship.

Many Israelis instinctively oppose dividing the capital, but many believe a peace deal cannot work without a Palestinian capital in East Jerusalem.

Anat Kurz, a senior research fellow at the Institute for National Security Studies at Tel Aviv University, said: ''In any two-state solution Israel will have to make some concessions on Jerusalem … The question is how the capital is to be shared. The problem for Netanyahu is that any move to negotiate on this question could make it very difficult for him to hold his coalition together.''

In September last year the then Israeli prime minister Mr Olmert said that whoever talked seriously about peace had to be prepared to share Jerusalem with the Palestinians.

''Whoever wants to hold on to all of the city's territory will have to bring 270,000 Arabs inside the fences of sovereign Israel. It won't work. A decision has to be made. This decision is difficult, terrible, a decision that contradicts our natural instincts, our innermost desires, our collective memories, the prayers of the Jewish people for 2000 years.''

During the general election campaign this year Mr Olmert's successor as leader of the Kadima party, Ms Livni, echoed the same sentiments, pledging to negotiate on sharing Jerusalem. Indeed, it was her refusal to rule out negotiations on the city's future in October last year that sent the country to the election, as the ultra-Orthodox Shas party refused to join a coalition led by Kadima without such a commitment.

Ms Livni said again this week that future negotiations with the Palestinians must begin where they left off under Mr Olmert.

''We need to continue negotiations from where we left off with Abu Alla,'' she said.