Israel claims Jerusalem settlement plan would not harm Palestinians

The Israeli prime minister, Binyamin Netanyahu, stepped up the row over Jewish settlement plans in East Jerusalem today, saying they would not hurt the city's Palestinian residents.

Speaking to Israel's parliament, Netanyahu said the construction of homes for Jews in the city's eastern sector "in no way" hurts Palestinians. His comments came after an admission by the Israeli ambassador to Washington that Israel's relations with the US are at their worst for 35 years.

US officials are reported to have urged Israel to reconsider sudden plans to build 1,600 homes in the occupied area, after they were described by one of Barack Obama's closest aides as an "affront" to the US that could undermine peace efforts in the Middle East.

Earlier, Netanyahu apologised for announcing the plans during a visit last week to Israel by the US vice-president, Joe Biden. "I recommend not to get carried away and to calm down," he said yesterday.

But he refused to cancel the programme and his attempt to downplay the dispute was exposed today when Israel's ambassador to the US, Michael Oren, admitted that relations between the two countries had reached a historic crisis.

"Israel's ties with the United States are in their worst crisis since 1975 … a crisis of historic proportions," Oren was quoted as saying in the Israeli media.

Unnamed Israeli officials have told Associated Press that the US is pressing Israel to scrap the building project. Israel's foreign ministry has refused to comment on either report.

Senior figures in the Obama administration have been unusually forthright in expressing frustration at the plans. On Friday Hillary Clinton, the secretary of state, said the announcement was "insulting", and yesterday David Axelrod, one of the architects of Obama's election victory, said the timing was "very destructive".

Speaking on NBC's Meet the Press, he said: "This was an affront, it was an insult but most importantly it undermined this very fragile effort to bring peace to that region."

The announcement last Tuesday that thousands of new homes were planned in Jewish settlements in East Jerusalem came on the eve of Biden's arrival in the region for discussions to restart "proximity talks" between Israel and Palestinians, with the US mediating. Almost immediately, the news prompted Palestinian leaders to pull out of the new round of talks.

Israel has agreed to slow construction of settlements in the West Bank but has refused to halt building in East Jerusalem. Israel considers East Jerusalem, which it captured in the 1967 war, its sovereign territory and Netanyahu has spoken frequently in defence of settlements there.