"Israel sees no connection between the peace process and the planning and building policies in Jerusalem that have not changed for the last 40 years," said a statement from the office of Prime Minister Benjamin Netanyahu.

"Jerusalem is not a settlement -- Jerusalem is the capital of the state of Israel," it said, adding that no Israeli government had ever curbed building in the Holy City since taking over and annexing the eastern sector during the 1967 Six Day War.

"Building in Jerusalem has never interfered with the peace process," it said, while admitting that differences with Washington over Jerusalem had been ongoing over the last 43 years.

Speaking later to Fox Business Network from the United States, Netanyahu said the settlement issue was "overblown."

AFP