JERUSALEM: The U.S. has demanded that Israel suspend a planned housing project in east Jerusalem, senior Israeli officials said Sunday - the latest sign of a deepening conflict between the two allies over Israeli settlements.

The officials confirmed that Israel's ambassador to the U.S., Michael Oren, was summoned to the State Department over the weekend and told that the project being developed by American millionaire Irving Moskowitz should not go ahead.

The officials spoke on condition of anonymity because they were not authorized to discuss with the media diplomatic flaps with the U.S.

Spokesmen for the U.S. Embassy and the Jerusalem municipality had no comment.

The international community considers Jewish neighborhoods in east Jerusalem to be settlements and an obstacle to Israeli-Palestinian peacemaking. Israel does not regard them as settlements because it annexed east Jerusalem in 1967 after capturing it in June of that year.

East Jerusalem is an especially volatile issue because the Palestinians want that traditionally Arab sector of the city to be the capital of their future state.

According to Army Radio, the U.S. has demanded that planning approval for the project be revoked.

Settlements have emerged as a major sticking point in relations between Israel and its strongest ally, the United States, under the Obama administration.

The Palestinians have been encouraged by Washington's insistence that Israel freeze all settlement construction on lands in east Jerusalem and the West Bank that the Palestinians claim for a future state.

They have refused to restart peace talks until Israel halts all settlement expansion, something the Israeli government has refused to do.

Moskowitz, an influential supporter of Israeli settlement in east Jerusalem, purchased the Shepherd Hotel in 1985 and plans to tear it down and build housing units in its place. The hotel is located near a government compound that includes several government ministries and the national police headquarters.