A controversial plan to demolish 22 Palestinian homes for a tourist centre in Jerusalem's eastern sector was approved by the mayor today.
Nir Barkat's decision threatened to raise tensions and draw renewed international fire on the heels of the Israeli sea raid.
Mr Barkat first floated the plan months ago, but agreed to a last-minute request from Israel's prime minister to consult Palestinian residents. Israeli demolition of Palestinian homes has previously brought harsh international reaction.
Palestinians hope to build the capital of a future state in east Jerusalem and see any Israeli construction there as undercutting their claims to the land. Although Israel claims it is simply enforcing the law by knocking down illegally built structures, many of the unapproved homes have gone up without authorisation because Palestinians have a hard time obtaining building permits in east Jerusalem.
Mr Barkat says the plan gives a much-needed facelift to Jerusalem's decaying al-Bustan neighbourhood, which Israel calls Gan Hamelech, or the King's Garden.
The plan calls for shops, restaurants, art galleries and a large community centre on the site where some say the biblical King David wrote his psalms. The 22 displaced families would be allowed to build homes elsewhere in the district, although it is not clear who would pay for them.
Israel annexed east Jerusalem immediately after capturing it from Jordan in the 1967 war.
Israeli sovereignty there has not been recognised by the Palestinians or the international community, and the fate of the city is the most charged issue dividing the two sides. Nearly 200,000 Jews have moved to east Jerusalem since Israel captured it, living in an uneasy coexistence with 250,000 Palestinians.
Activists in Al-Bustan, who had sought to block the demolitions, said that the plan "comes in the general context of (the) fast-track Judaisation" of east Jerusalem.
It pre-empts "the possibility of Jerusalem ever being a shared city, or indeed capital of a Palestinian state. This in itself precludes peace."
The contested site is a section of a larger area called Silwan, which is home to some 50,000 Palestinians and 70 Jewish families. Demolitions elsewhere in Silwan have made it a hub of tension between Palestinians fearful of eviction and Jews determined to keep the city Israel's undivided capital.
Apparently fearing stiff criticism from the US, Israeli Prime Minister Benjamin Netanyahu pressured Mr Barkat in March to hold up the plan to consult with Palestinians who stood to lose their homes.
"Now, after fine-tuning the plan and seeking more cooperation with the residents as far as their needs and improving the quality of their lives, the municipality is ready to submit the plans for the first stage of approval," the mayor's spokesman said.