The Gilo neighborhood was born out of an argument between the US and Israel over the status of the capital's Jewish neighborhoods over the Green Line.
Back then, in 1970, the US wanted Israel to adhere to the Rogers Plan, which called for the withdrawal to the pre-1967 line.
Prime minister Golda Meir's response was to initiate plans for Gilo, located over that line in the capital's south, as well as for the northern neighborhoods of Ramot and Neveh Ya'acov, Yoram Ettinger, an expert on Israeli-American relations, explained last week.
Thirty-nine years later, Gilo is home to 40,000 people and seems so indistinguishable from the rest of the city that residents and officials were surprised to hear US President Barack Obama refer to it as a "settlement" during an interview he gave to Fox News in China on Wednesday.
He spoke in response to news that plans for 900 housing units in Gilo had been approved by the local planning committee.
The plan, which now must undergo a period of public comment, is far from being implemented, but news that the project had gone this far drew immediate condemnation from the international community, which believes that both the Jewish neighborhoods of east Jerusalem and West Bank settlements are illegal.
But Israel, which annexed east Jerusalem after the Six Day War, applies Israeli law to the entire city, even as the Palestinians claim east Jerusalem as the capital of their future state.
Building projects in Jewish neighborhoods of east Jerusalem, therefore, are processed under the same building and planning laws that apply to any other part of the country.
This means that despite the diplomatic perils of east Jerusalem building approval, the process is under the aegis of the municipality.
Although news of the project immediately got Israel and Prime Minister Binyamin Netanyahu into hot water with the Americans, there is no procedure by which the prime minister is notified when these plans come up for local approval. Nor is his approval necessary for the plan to proceed.
To Jerusalem's Deputy Mayor for Planning and Environment Naomi Tsur, the question of involving the prime minister in the planning process seemed odd.
"Why should it?" she asked. "What you have to take into account, here, is that as far as the city of Jerusalem is concerned, this is just another one of many plans. There is nothing ominous that it came up on Tuesday.
"It is a terrible pity that the world has so little understanding of what I would call the facts on the ground," continued Tsur.
"There has been a tremendous misunderstanding by the international community about what is the city of Jerusalem and what is a settlement. Gilo is a neighborhood of Jerusalem," said Tsur.
Until now, she said, building in Gilo hadn't had any diplomatic consequences.
In contrast, other east Jerusalem neighborhoods such as Har Homa, begun in 1997, were immediately controversial in the eyes of the international community, which has also objected to construction in the West Bank.
This settlement construction, unlike east Jerusalem building, has a different approval procedure than areas within the Green Line, because it falls under the jurisdiction of the Defense Ministry, and much of the planning is done under that ministry's auspices. The Defense Ministry has to approve all Jewish construction in the West Bank and as of December 2007, the Prime Minister's Office must also sign off on it.
Since assuming office on March 31, Netanyahu has refused to authorize any new permits for construction in West Bank settlements, and is now reportedly weighing extending that moratorium for another 10 months.
But he has refused to stop building in east Jerusalem or to consider changing the construction status of those neighborhoods, in spite of American and Palestinian demands that he do so.
The United States has been split in its approach to Jewish building in east Jerusalem, with the State Department condemning it and Congress supporting a united Jerusalem as the capital of Israel, said Ettinger.
In 1995, Congress passed the Jerusalem Embassy Act, which supports a united Jerusalem and mandates that the US Embassy be moved from from Tel Aviv to the capital.
However, the act allows the president to suspend action toward the move every six months if he deems that "such suspension is necessary to protect the national security interests of the United States."
Since the act was passed, every US president has regularly invoked this clause, and the embassy has remained in Tel Aviv.
As a testament to the schizophrenic nature of America's stance on Jerusalem, seven senators earlier this month filed a bill, called the Jerusalem Embassy Relocation Act, which would amend the 1995 act by removing this presidential waiver.