Palestinians fear Israel is trying to pre-empt negotiations about the final status of the city, which are not due to start until May next year, by systematically establishing facts on the map.
The row began on 30 April, when Israel said it would confiscate 140 acres in Arab east Jerusalem to build Jewish neighbourhoods. The Israeli Housing Minister, Benjamin Ben-Eliezer, dropped another bombshell yesterday, when he talked about confiscating 300 acres in east Jerusalem, in the first stage of a plan to build 30,000 apartments. And both sides agreed to call off talks planned for yesterday, without any agreement on a date for a future meeting.
Palestinians see the proposed confiscation as the latest step in undermining their position in east Jerusalem, which they claim as their capital, but where 155,000 Palestinians are now outnumbered by 160,000 Jews. Also fuelling Palestinian anger is a bidding war for the American Jewish vote which yesterday led Senator Bob Dole and Speaker Newt Gingrich to introduce legislation in Congress to transfer the US embassy to Jerusalem.
Yasser Arafat, the PLO leader, urged President Bill Clinton to resist pressure for the change. "We regret the position of some congressmen who call for the transfer of the US embassy ... at a time when the peace process is facing many dangers," Mr Arafat's spokesman, Nabil Abu Rudeina said.
Because of its religious significance, Jerusalem is probably the one issue capable of briefly uniting the Arab states. When he first received the Koran, the Prophet Muhammad prayed towards Jerusalem, not Mecca. Jerusalem is still the second most important place of pilgrimage for Muslims. Fear for it mobilises Arabs and Palestinians in a way in which larger Israeli land confiscations on the West Bank do not. In 1990 Israeli soldiers killed 17 Palestinians who had poured on to the 34-acre masonry platform known as the Haram al-Sharif in the heart of the old city to defend the Dome on the Rock and the al-Aqsa mosque from an extreme Jewish group.
Adnan Husseini, director of the Waqf religious endowment, which looks after the Muslim shrines, said he was outraged by repeated Israeli attempts to take over the old city. "After the 1967 war, Israeli bulldozers demolished the Moorish quarter [to give access to the Western Wall] after a decision to confiscate it," he said." A tunnel dug along the Western Wall of the Haram is being extended beneath the Muslim quarter, where an exit is to be opened in the Via Dolorosa.
Palestinians say the diggings have been speeded up to be ready in time for a festival called "Jerusalem 3,000", celebrating the capture of the city 3,000 years ago by King David. The festival begins in September.
"The timing is perfect to reaffirm Israel's sovereignty over Jerusalem," the right-wing Mayor of the city, Ehud Olmert, said.
Some Israeli commentators suggest that Israeli actions in Jerusalem have breached the Oslo agreement of 1993, under which both sides agreed to do nothing to pre-empt next year's talks on Jerusalem. "Israel acted to tip the balance in her favour," said Davar newspaper. "She authorised grandiose building plans in controversial areas ... and very much restricted Palestinian activity in east Jerusalem."
Further complicating negotiations between Israel and the Palestinians is the tussle between President Bill Clinton and Senator Dole for Jewish support in the US. Senator Dole, who had hitherto shown little interest in the location of the US embassy in Israel, repeatedly brought members of the American-Israel Public Affairs Committee - one of the most powerful lobbies in Washington and which had earlier been addressed by Mr Clinton - to their feet when he told their conference he would immediately introduce legislation transferring the embassy to Jerusalem.
The White House would certainly veto such a move but the Republican action further undermines Palestinian confidence in US mediation which, after the Gulf war, was the basis for the peace agreements between the PLO and Israel.