In the next few weeks Benjamin Netanyahu, the Prime Minister, is likely to approve a Jewish neighbourhood with an initial population of 25,000 on land captured in 1967, Israeli officials said.
Faisal Husseini, the Palestinian leader in Jerusalem, said: "What happened after the opening of the Western Wall tunnel is nothing compared to what is liable to happen now."
Har Homa is a long, steep hill, covered with pine trees, between the predominantly Christian Palestinian township of Beit Sahour outside the city and the Jewish suburb of Jerusalem called Ramat Rakhel. Designated a "green area" after 1967, it was expropriated in 1991. There have been skirmishes between Israeli soldiers and Palestinian farmers who lost their land. About 6,500 apartments will be built under the first phase of the project, but the overall plan is to expand the settlement to house 70,000 people.
Mr Netanyahu is being pressed to begin work by elements of his right- wing coalition nervous that he is backsliding over election pledge not to make any compromises with the Palestinians over Jerusalem. Ehud Olmert, Mayor of Jerusalem, has threatened to send in bulldozers on his own account to start construction.
Danny Seidemann, a lawyer opposing the project before the courts on behalf of Palestinian communities and the Israeli peace group Ir Shalem, said: "No Israeli politician has ever lost a vote by being too tough on Jerusalem." It is not clear how Yasser Arafat, the Palestinian leader, will react if construction goes ahead.
Unlike the opening of the tunnel in the Old City of Jerusalem in September, which provoked fighting in which 15 Israelis and 61 Palestinians died, Har Homa is not near any Muslim shrines. On the other hand, Ami Ayalon, head of the Shin Bet security agency, said yesterday that even if Mr Arafat did not want violence, ordinary Palestinians might still react strongly "because of the volatility of the Jerusalem situation".
Har Homa occupies a strategic location. "It is the place, not the numbers, which matter," said Amiram Gonen, a specialist on the geography of Jerusalem. He said Har Homa would complete a rampart of Jewish settlements on the southern boundary of the city, breaking the continuity of Palestinian neighbourhoods. About 78 per cent of the 600,000 people in Jerusalem are Jewish. But this figure is deceptive: Professor Gonen points out that in the metropolitan area of the city, Jews make up only 55 per cent.
Mr Netanyahu appears eager to avert a confrontation over Har Homa, which might undo his efforts to present a more moderate image in the aftermath of the partial Israeli withdrawal from Hebron. Mr Seidemann said: "The same people who failed to stop the peace process by voting against the Hebron agreement are now trying to do the same thing by building at Har Homa." In contrast to Hebron, however, the building of a new settlement in Jerusalem enjoys strong support from centrist politicians like Ehud Barak, expected to be the Labour party's next leader.
Har Homa is not the only sign that the struggle for Jerusalem is heating up. The 170,000 Palestinians in the city say Israel is stepping up efforts to deprive them of Jerusalem identity papers if they go abroad for work or study. Some who were born in Jerusalem but who have foreign passports have been told they must choose between their Jerusalem identity papers and their passport.
Because of the growing insecurity of their position, an increasing number of Palestinians in Jerusalem have taken up Israeli citizenship, which they rejected in the past. The campaign to reduce the number of Palestinians in Jerusalem is gathering pace.