Netanyahu also blocked a project funded by Dr. Irving Moskowitz six months ago to head off mounting political confrontation with the Palestinian Authority.

Interior Ministry officials said the approval for the construction, on land owned by Moskowitz, a Miami developer, was granted along with approval for the construction of more than 500 units for Arabs in the Ras al-Amud neighborhood.

Earlier this year, Arab residents of Ras al-Amud filed a suit demanding that the plan for Arab housing be approved. But it was found at the time that both the Arab project and Moskowitz's project had to be approved for either to begin.

Jerusalem Mayor Ehud Olmert said he would not block the two projects.

"I am all for construction for Arabs and Jews," he told reporters.

The Palestinian Authority official in charge of Jerusalem affairs said he hoped the prime minister intended to keep his pledge to block the building.

"We do not understand, why don't the Israelis build in western Jerusalem?" said Faisal Husseini.

The Palestinians want eastern Jerusalem as the capital of a future, independent Palestinian state.

The status of the city is one of the issues to be decided in final status negotiations.

The Palestinians broke off political negotiations with Israel last March, after ground was broken for a new Jewish neighborhood in southeastern Jerusalem, saying it was a unilateral move that altered the status quo.