Israeli Prime Minister Benjamin Netanyahu on Monday said that his administration will continue construction in Jerusalem, defying U.S. pressure and sending chills into an already strained relationship between the two traditional allies.

"In the past 40 years, there was no government that limited construction in any Jerusalem area or neighborhood," Netanyahu said in the Israeli parliament, while claiming that "building Jewish neighborhoods did not hurt Jerusalem's Arab residents and was not at their expense."

With regard to the Jewish settlements in the West Bank, Netanyahu told other lawmakers from his rightist Likud party that construction will resume upon the expiration of the 10-month moratorium his administration announced in late November on new construction projects in West Bank settlements.

"Construction in Jerusalem, and anywhere else, will continue as has been the custom during the past 42 years" since the Jewish state captured in the 1967 Middle East war East Jerusalem, the West Bank and the Gaza Strip, said Netanyahu.

These comments came amid simmering tensions between the Jewish state and its most important ally, the United States, triggered by an Israeli plan to build 1,600 new housing units at a Jewish neighborhood in East Jerusalem, the Arab-dominated section of the holy city the Palestinians claim to be the capital of their future state.

Recent days have seen U.S. officials line up to condemn the Israeli project, announced last week just as U.S. Vice President Joe Biden was in Israel for peace-making efforts and widely seen as nothing less than a slap in the face to the U.S. veep.

Secretary of State Hillary Clinton and other U.S. senior officials referred to the incident as an "insult" to the United States.

The dramatic development also posed a fatal danger to the U.S. peace-making efforts, which were just about to bear fruits with the commencement of U.S.-brokered Israeli-Palestinian indirect talks. Infuriated Palestinians have now vowed not to enter the parley until Israel rescinds the East Jerusalem construction project.

Over the weekend, Clinton has reportedly urged Netanyahu to investigate the scenario of the embarrassing announcement of the building plan, reverse the decision on the project, make more confidence-building moves on the ground and pledge to deal with all the core issues of the decades-old conflict in talks with the Palestinians.

The Israeli side has apologized for the "unfortunate timing" of the announcement, and has established a task force to probe what Netanyahu dubbed a regrettable incident that should not have happened. Yet the Jewish state has so far signalled no intention to cancel the project, as such a move would possibly result in the collapse of Netanyahu's right-wing-dominated ruling coalition.

Amid the ongoing discord, the Israeli-U.S. ties have plummeted to the lowest level in 35 years, local media quoted the Jewish state's ambassador to Washington Michael Oren as telling Israeli consuls in the United States on Saturday night, reminiscent of a period of icy relations between the two countries in 1975 when the United States pressured Israel to redeploy its forces in the Egyptian Sinai Peninsula, which the Jewish state had captured in the 1967 war.

The crisis emerged in the wake of a year of sparring between the two allies, with the Netanyahu administration refusing U.S. calls for a complete settlement construction freeze both in the West Bank and in East Jerusalem. Late last year, tensions abated as the United States softened its position and Israel decreed the temporary suspension.

East Jerusalem, boasting the holiest Jewish site and the third holiest Islamic site, has long been at the forefront of the intractable Mideast feud. The Jewish state claims the whole Jerusalem as its indivisible capital, and has for decades refused to make concessions on this subject, although the international community, including the United State, does not recognize its unilateral annexation of the eastern section.

About 180,000 Jews are currently living in East Jerusalem, in addition to the 300,000 Jewish residents in the West Bank. The Palestinians have stressed that the Israeli "occupation" has deprived them of the possibility to build a viable state on the two areas along with the Gaza Strip.