The US President Barack Obama has strongly reiterated his demand that Israel must stop illegal settlement activity in occupied West Bank including east Jerusalem for the sake of both American and Israeli long-term interests.

"Part of being a good friend is being honest," Obama told National Public Radio on Monday. "And I think there have been times where we are not as honest as we should be about the fact that the current direction, the current trajectory, in the region is profoundly negative, not only for Israeli interests but also US interests.

"We do have to retain a constant belief in the possibilities of negotiations that will lead to peace," he added. "I've said that a freeze on settlements is part of that."

Tensions between the Obama administration and Benjamin Netanyahu's government are nearing crisis levels after senior American officials harshly criticized the prime minister and his settlements policies on Monday.

Netanyahu slammed Obama administration by refusing to freeze the illegal settlements and made the new most popular American government look rather bad insofar as American stand in the world is concerned.

A US-sponsored 2003 peace "road map" obligates Israel to stop settlement activity on occupied land Palestinians see as part of their future state and that the World Court deems illegal. The Obama administration has pushed Israel to halt such moves.

When asked about Israel's refusal to commit to a complete settlement freeze, the US President told NPR it was still too early to determine what measures the administration could take to pressure Jerusalem.

"It's still early in the process," Obama said. "They've [Israel] formed a government, what, a month ago?"

"We're going to have a series of conversations," the president told NPR. "I believe that strategically, the status quo is unsustainable when it comes to Israel's security," Obama said. "Over time, in the absence of peace with Palestinians, Israel will continue to be threatened militarily and will have enormous problems on its borders."

Meanwhile, Washington is furious over the Interior Ministry's anticipated approval of a plan to build a new hotel in East Jerusalem, just 100 meters from the Old City's walls. The plan will lead to the demolition of a wholesale Palestinian market and kindergarten.

In conversations with Israeli officials, senior American officials have made it clear that they want Israel to freeze all plans for expanding the Jewish presence in East Jerusalem, and especially in the Holy Basin - the area adjacent to the Old City.

Haaretz said on Tuesday that the regional planning and building committee for Jerusalem will discuss the plan Tuesday. It was submitted by the Jerusalem municipality, which owns the land on which the hotel is slated to be built, and the state-owned Jerusalem Development Authority, which will actually construct it.

A senior US official told Haaretz “the Israelis apparently wanted to check if we are serious on settlements, and they found out that we are," "This has nothing to do with the speech in Cairo, and it's going to be our position after the speech in Cairo, because we believe it's in Israel's long-term security interests."

Monday night Defense Minister Ehud Barak met in New York with the US special envoy to the Middle East, George Mitchell. The American told Barak that the US was no longer willing to return to the understandings between the Sharon and Olmert governments and the Bush administration, which allowed continued settlement construction.

Mitchell said the administration was particularly unhappy about the Netanyahu government's unwillingness to recognize the principle of two states for two peoples.

Mitchell also emphasized that the US does not accept the concept of "natural growth" for the settlements.

"We did not hear from the Bush administration about any of these so-called understandings with Israel on the settlements - all of which were supposedly oral understandings between different people every time," said one senior American official as quoted by Haaretz on Tuesday.

"But we've never heard a thing about them - they certainly weren't formal agreements between our governments. "The Israelis want us to commit to oral understandings we have never heard about, but at the same time they are not willing to commit to written agreements their government has signed, like the road map and commitment to the two-state solution."

According to Haaretz, The disagreement over the understandings concerning the settlements produced an embarrassing encounter in London last week during a meeting between Mitchell, Deputy Prime Minister Dan Meridor and a number of Netanyahu's advisers.

At the meeting, the Israelis claimed there was a letter between former president George W. Bush and former prime minister Ariel Sharon stating that the settlement blocs would remain in Israeli hands, so construction is permitted there. Mitchell showed the Israelis that one of the letter's sections discusses the principle of two states for two peoples. "That is also written in the letter - do you agree to that?" he asked.(agencies)