Officially, Israel considers the Arab neighborhoods of Jerusalem as part of its "undivided and eternal" capital.

But in practice, there's been an erosion of Israeli sovereignty on Jerusalem's eastern outskirts in recent months as the Palestinian Authority (PA) steps up a quiet campaign to fill a vacuum of municipal services – building new schools, filling potholes, and maintaining public order.

Amid expectations that peace negotiators will soon revisit the high-stakes dispute over a city sacred to both Jews and Muslims, the activity highlights a reassertion of Palestinian claims to East Jerusalem as their capital after nearly a decade of quiescence. Spearheaded by Prime Minister Salam Fayyad, the Palestinian effort fits into a broader escalation of rival claims that has ratcheted up tension on the ground and among heads of state.

"It's almost a law of physics. As we get to the final-status issues, it's not at all surprising that you're going to see increased interest and engagement of the Palestinians in the affairs of East Jerusalem,'' says Danny Seidemann, a Jerusalem lawyer who has pushed for a compromise in the city. "The battle for Jerusalem has already started, and it's been going on under the radar for several months now.''

Why E. Jerusalem neighborhoods are so neglected

After winning control of East Jerusalem from the Jordanians in the 1967 war, Israel annexed not only the Jordanian-defined area of the city but large swaths of the West Bank to its capital – a move never recognized by the international community.

The Palestinians claim East Jerusalem as the capital of their future sovereign state, an arrangement widely recognized as a key pillar in any two-state solution.

But on Nov. 22, Israeli lawmakers passed a bill requiring a public referendum for any peace deal that cedes control of East Jerusalem to the Palestinians, if that deal is not approved by two-thirds of the parliament.

Uncertainty over the eventual fate of East Jerusalem has undoubtedly contributed to 43 years of neglect in the city's Arab neighborhoods, though low tax revenues factor in as well.

Sidewalks often do not exist, while street lighting is patchy, if provided at all. Sewage facilities and access to the water mains, taken for granted by Jewish families, are lacking. And a report by the Association of Civil Rights in Israel says that there is a shortage of 1,000 classrooms in East Jerusalem, despite Israel’s obligations to provide free education for everyone.

Palestinians account for 35 percent of Jerusalem’s total population yet benefit from just 8 to 10 percent of the municipality’s budget, according to Ir Amim, an Israeli nongovernmental organization founded by Mr. Seidemann.

But Eli Isaacson, spokesman for the Jerusalem municipality, says tax revenues gathered from East Jerusalem residents are considerably lower than in Jewish districts – not least because many buildings are built without permits, thus avoiding associated municipal fees that help pay for city services.

PA spends $15 million to upgrade schools

By not adding classrooms, creating parks, or collecting the garbage of the city's 250,000 Palestinians who pay taxes to the Jewish state but do not vote, Israel has left an ample vacuum of authority for the Palestinians to fill. What was once one of the most affluent Palestinian cities has now fallen behind West Bank cities such as Ramallah.

As part of his larger state-building efforts, Prime Minister Fayyad has spearheaded a renewed Palestinian effort in the past year to boost Arab areas of Jerusalem – both by reaching out to the city's residents and by lobbying foreign donors.

A key focus is education. While Mayor Nir Barkat has made upgrading Jerusalem's schools of his main priorities, Palestinians have been impatient for more tangible progress. The PA recently spent $15 million of its own money to renovate 13 schools within the city limits, according to PA spokesman Ghassan Khatib. The Faisal Husseini Foundation, an independent non-profit that works in tandem with the PA kicked in an extra $3.9 million.

"The Palestinian Authority is trying to channel money, either directly or indirectly to help inside of Jerusalem,'' says Abdel Kader Husseini, the former leader's son and foundation chairman. "[Fayyad] is telling everyone, 'Just bring me your needs and it will be implemented.' "

When word got out that Fayyad would attend the dedication of a school inside the municipal boundaries earlier this month, Israel authorities kept him outside the city limits.

“Israel is trying to prevent the Palestinian Authority from extending services to east Jerusalem. Yet at the same time, it is not fulfilling its duties as an occupying power,” says Mr. Khatib.

Out of fear of being shut down by Israeli authorities if they go public, PA-supported schools in Jerusalem shun the spotlight.

For example, in the garbage-strewn warrens of Jerusalem's Shuafat refugee camp, the principal of the Maseera school refused to discuss the newly opened high school except to say that 140 girls are enrolled. A plaque outside the entrance said the funds for the school came from a Moroccan charity.

A step toward PA taking control?

Shuafat, one of several Jerusalem neighborhoods cut off from the rest of the city by the separation wall, receives virtually no services at all.

The vacuum is so serious that residents of the Shuafat camp called on Palestinian security officers to settle local disputes, according to a front-page story in the Ma'ariv newspaper.

The PA also stepped in recently to pay for road works in the Arab suburb of Dariyat as-Salaam, next door to the camp, after repeated appeals to the Jerusalem municipality went unanswered.

Residents of the suburb complained that the road paving would not last the winter and that someone should collect the garbage. But when asked about the Palestinian involvement, teacher Amin El Barhai cracked a smile and explains: "Maybe this is a step toward transferring this area to the Palestinian Authority.''