JERUSALEM, By ARON HELLER (AP) — The Jerusalem municipality has approved 20 new apartments for Jews in east Jerusalem, the city said Wednesday, in a move that could stir a new diplomatic crisis with the United States.

News of the approval came as Israel's prime minister was in Washington to try to calm a growing rift with the Obama administration over such construction plans.

The U.S. views Israeli building in east Jerusalem, the part of the city claimed by Palestinians as their future capital, as disruptive to Mideast peacemaking efforts. Israel insists that Jerusalem cannot be divided and reserves the right to build anywhere.

The new project is funded by American millionaire Irving Moskowitz. It calls for tearing down part of an old hotel, the Shepherd, and building 20 apartments and a three-level underground parking lot instead.

Last summer, the U.S. demanded that Israel suspend the housing project and even summoned Israel's ambassador to the U.S. over the issue.

The Jerusalem municipality said the final go ahead was given a week ago after a lengthy bureaucratic process.

City spokesman Gidi Schmerling said plans for the project have been known since last July and that last week's approval was merely a procedural step. He said media reports were blowing the matter out of proportion, saying they were "meant to create a provocation during the prime minister's visit in the U.S.”

Israel annexed east Jerusalem after capturing it in the 1967 Mideast war, but no other country recognizes the annexation. The international community sees Jewish neighborhoods in east Jerusalem as no different from settlements in the West Bank.

Moskowitz, an influential supporter of Israeli settlement in east Jerusalem, purchased the Shepherd Hotel in 1985. The hotel is located near a government compound that includes several ministries and the national police headquarters.