JERUSALEM -- Israel plans to build a 200-room hotel next to the Old City of Jerusalem, the Interior Ministry announced Tuesday, drawing a mild protest from the United States.
An official at the U.S. Consulate in east Jerusalem expressed concern about demolition of Palestinian properties that are part of the construction plan.
Israel captured east Jerusalem, including the Old City, in the 1967 Mideast war. Unlike the West Bank and Gaza, Israel annexed east Jerusalem shortly after the war, a move that has not been recognized by any other country.
The Palestinians claim east Jerusalem as the capital of the state they want to establish.
Ir Amim, a group that opposes Israeli construction projects in east Jerusalem, charged that the hotel was part of a larger plan to build a "biblical kingdom" in the area, a way of solidifying Israeli control. Ir Amim said a kindergarten and wholesale market would be destroyed to make way for the hotel.
"The Interior Ministry is heavy-handedly violating the city's delicate balance and undermining its stability," Daniel Seidmann of Ir Amim said in a statement.
The Interior Ministry statement said, "a number of existing businesses will receive alternative locations in the commercial areas that are part of the proposed project."
While previous Israeli governments indicated readiness to relinquish control of parts of the city to the Palestinians in a peace deal, current Prime Minister Benjamin Netanyahu has reverted to earlier policy that stated that all of Jerusalem is Israel's capital, and it will not be divided.
Israel is already on a collision course with the administration of President Barack Obama over settlements in the West Bank. Obama and his secretary of state, Hillary Rodham Clinton, have demanded a total freeze of construction in Jewish settlements, while Netanyahu has demanded the right to keep building inside existing settlements for "natural growth."
About 300,000 Israelis live in 121 settlements in the West Bank, and another 180,000 live in a ring of Jewish neighborhoods built around the Arab section of Jerusalem since the territory was captured in 1967.
Palestinians and most world bodies consider all of them illegal settlements that must be removed, though previous rounds of failed negotiations moved in the direction of accommodation by allowing some to remain by trading land in Israel for them.
The American consulate official repeated U.S. policy that the status of Jerusalem must be determined in peace negotiations, but noted that the hotel plan would change the status on the ground, and the U.S. is opposed to that.
Disputes over Jerusalem's holy sites have been more damaging to past peace efforts than disagreements about the Jewish neighborhoods. An Old City hilltop is the site of the Al Aqsa Mosque compound, built over the ruins of the biblical Jewish Temples. Both sides claim sovereignty over the site. The dispute has triggered several rounds of bloody clashes between the two sides over the years.