JERUSALEM – Prime Minister Benjamin Netanyahu, saying he would not take orders over Israeli settlement in East Jerusalem, rejected on Sunday a U.S. demand to halt plans to build more homes for Jews in the disputed area.

New friction with Washington over the project to build 20 apartments in a part of Jerusalem captured by Israel in a 1967 war could deepen the most serious rift in relations between the two allies in a decade.

Israeli officials said the State Department had summoned Michael Oren, Israel's ambassador to Washington, and told him plans for the construction approved this month by Israel's Jerusalem municipality should be suspended.

We cannot accept the idea that Jews will not have the right to live and buy (homes) anywhere in Jerusalem, Netanyahu said, calling the city Israel's united capital, a claim that is not recognized internationally.

I can only imagine what would happen if someone would suggest Jews could not live in certain neighborhoods of New York, London, Paris or Rome. There would certainly be a great international outcry, he told reporters at the weekly cabinet meeting. We cannot accept this edict in Jerusalem.

The White House declined to comment.

Netanyahu and President Barack Obama are already at loggerheads over the U.S. leader's call for Israel to freeze Jewish settlement on occupied land Palestinians want for a state.

Obama's Middle East envoy, George Mitchell, due back in the region soon, and Israeli Defense Minister Ehud Barak have been trying to work out a settlement deal that would include initial steps by Arab countries to normalize relations with Israel.

But constraints on Jewish settlement in Jerusalem could put a heavy strain on Netanyahu's coalition, in which the future of the holy city is a red-flag issue for Jewish religious and ultranationalist partners.

Responding to Netanyahu's comments, Palestinian chief negotiator Saeb Erakat said the Israeli leader had to realize that settlements and peace are two parallels that do not go together.

ABANDONED HOTEL

Israel annexed East Jerusalem and declared all of the city its capital after the 1967 war. Palestinians say Jewish settlement on occupied land could deny them a viable state.

The housing project is within a compound in the Sheikh Jarrah neighborhood where the now-defunct Shepherd Hotel stands. It was bought in 1985 by an American Jewish millionaire who has been funding Jewish housing projects in East Jerusalem.

Israel's Jerusalem municipality said its planning committee, acting in full transparency, gave approval for the 20 apartments and pledged to preserve the historic structure at the site.

Palestinians have questioned the legality of the acquisition, saying the compound had belonged to the former grand mufti, the leading Muslim cleric in Jerusalem, Haj Amin al-Husseini. He went into exile in 1937 and died in 1974.

Israel designated the plot as absentee property after the 1967 war.

(Editing by Peter Millership)

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