Israel Plans New East Jerusalem Housing : Mideast: A major project for Arab area is announced by Shamir. The action runs counter to U.S. policy.

Prime Minister Yitzhak Shamir announced plans Sunday for a major new housing project in East Jerusalem, underlining his government’s contention that, despite longstanding objections from Washington, the annexed Arab-populated part of the city is forever Israel’s and not subject to negotiation.

The announcement came on the heels of a decision by the Bush Administration to provide guarantees for a $400-million loan to construct housing for new Soviet immigrants to Israel. None of that money will be used for the new project, Israeli officials said. But the plan raises the issue of whether American aid to Israel, in effect, frees up money that permits Israel to fund settlement projects that run counter to U.S. policy.

The Shamir announcement comes at a sensitive moment for the United States, which is trying to hold together a military alliance with Arab countries to confront Iraq’s takeover of Kuwait.

The Arab countries, including Egypt and Saudi Arabia, reject Israel’s control of Jerusalem and especially the annexation of East Jerusalem, where 140,000 Palestinians live. In effect, the United States is in the position of having to maintain contradictory alliances--one with Israel and one with the Arabs--that are at odds over the Palestinian issue and the question of Jerusalem.

Israel annexed the eastern half of the city after the 1967 Middle East War, when the area was wrested from Jordan. Washington has never recognized the annexation, although successive administrations have looked the other way over the years as Israel has built numerous neighborhoods ringing Arab enclaves.

Last spring, President Bush told a press conference that he opposed Israeli settlement not only in the occupied West Bank and Gaza Strip, but also in East Jerusalem. Israel is continuing to expand settlements in both the occupied territories despite repeated Bush Administration complaints that the settlements stand in the way of resolving the Israeli-Palestinian conflict.

“We hope there will be no anger in Washington,” said Avi Pazner, the prime minister’s spokesman. “For 20 years, there has been building activity there (in East Jerusalem), and it will continue.”

Shamir made his announcement during the inauguration of a new religious school in East Jerusalem, Israel Radio reported. The new housing will be built for strictly Orthodox religious families on an undeveloped ridge between Mt. Scopus, which is the site of a main campus of Hebrew University, and the Mount of Olives, a largely Palestinian community.

About 140,000 Israelis live in East Jerusalem neighborhoods.

Shamir told reporters that Israel will live up to a commitment not to use U.S. money for housing Soviet Jews in the occupied territories. Asked whether the pledge applied to East Jerusalem, Shamir replied that “Jerusalem is an integral part of the state of Israel.”

Earlier this month, the Bush Administration and the Shamir government reached an agreement on the loan guarantees that will save Israel $21 million in borrowing costs. Secretary of State James A. Baker III declared that the Israelis had given assurances “considerably beyond” a previous commitment not to apply American aid to the West Bank and Gaza Strip.

At the time, Israeli officials insisted that the pledge would not include East Jerusalem, which lies beyond the old Green Line that once divided the city between Arab and Israeli sectors.