Beginning as a spat over a single housing project, a dispute this week between the Obama administration and Israel has ballooned into the biggest U.S.-Israeli clash in 20 years, adding to months of strain between Washington and one of its closest allies.

Israel's decision to move ahead with 1,600 new housing units in East Jerusalem, announced during a visit by Vice President Joe Biden, drew criticism from Washington in language rarely directed at even Iran or North Korea.

Secretary of State Hillary Rodham Clinton said Israel's announcement "was an insult to the United States."

In a 45-minute telephone call Friday to Prime Minister Benjamin Netanyahu, Clinton upbraided him and demanded that he take more steps to show his nation's commitment to peace.

A senior U.S. official, speaking on condition of anonymity in the midst of the diplomatic friction, described the administration's objection to the project as "the first time the U.S. has really pushed back hard."

The Israeli government, stunned and perplexed by the U.S. assault, tried to regroup this weekend. Netanyahu convened seven members of his Cabinet on Saturday to consider their response, and his office said a committee would investigate the timing of the housing announcement.

Underlying the diplomatic fracture are complicated political calculations by both governments. Clinton's criticism, authorized by President Obama, was aimed at trying to obtain concessions from the conservative Israeli government at a moment when Netanyahu may be politically vulnerable, officials said.

The U.S. goal is to win Israeli agreement to back off the housing project and to forgo announcements of additional Jewish construction in East Jerusalem, officials said. The administration also wants Israel to agree to discuss substantive issues in new peace talks that could begin in coming days, U.S. officials said.

U.S. officials hope that the Israeli concessions might enlist support for the talks from the Palestinians and Arab states, which have been wavering since the Israeli announcement Tuesday inflamed Arab opinion.

Netanyahu's position in his government coalition is "perilous," another senior U.S. official said, as the prime minister is being pushed to give ground at a moment when he is taking criticism from some on the Israeli right, as well as those in the country's center and left.

But the Netanyahu government believes it has solid public support within Israel for building new housing in Jerusalem, which many Israelis as well as Palestinians consider God-given soil.

On Saturday, Palestinian negotiator Saeb Erekat reiterated that Palestinians would not take part in the new talks unless the Israelis abandon the project in the Ramat Shlomo neighborhood.

Experts questioned whether the blow-up would have a long-term effect on U.S.-Israeli ties.

Daniel Levy, a former Mideast peace negotiator, said the administration is trying to "lay down a marker with [Netanyahu] that they will not allow him to make them look weak."

The administration is "bleeding credibility with the Arab world" because Arabs believe Netanyahu is being "handled with kid gloves," he said.

The flare-up recalled the period of 1991-'92, when the administration of President George H.W. Bush held up financial aid to pressure Israel. By comparison, Levy said, the United States has used tough language in the latest controversy but has not yet taken steps "creating consequences" for Israel.

"Question is: What do they do next, assuming that Bibi continues to act up?" he said, using Netanyahu's nickname.

"This is more than a tempest in a teapot, but less than a strategic crisis," said Ziad Asali, president of the American Task Force on Palestine, an advocacy group in Washington.

The Obama administration, facing midterm elections this year, cannot afford to alienate Jewish Americans who support Israel. Israel's advocates in the U.S. called Clinton's words Friday "a gross overreaction."

"We cannot remember an instance when such harsh language was directed at a friend and ally of the United States," said Abraham Foxman, president of the staunchly pro-Israel Anti-Defamation League.

Last year, the Obama administration demanded a freeze in Jewish settlements in the West Bank, but Israelis resisted. Talks between Israelis and Palestinians broke down over the issue, and Biden traveled to the Mideast last week in an effort to restart the process and smooth relations.

Israelis were perplexed by the U.S. criticism because Biden on Thursday expressed satisfaction with the Israeli response to the flap and pronounced his visit a success. Clinton's criticism came after that.

U.S. officials said the administration wanted Biden to send a friendly message to the Israeli public, while Clinton must demand more of the Israeli government.

paul.richter@latimes.com

Times staff writer Edmund Sanders in Jerusalem contributed to this report.