Jewish neighborhoods in east Jerusalem are included in the US demand that Israel halt "settlement" construction, including for natural growth, State Department spokesman Ian Kelly told The Jerusalem Post during a press briefing on Monday. "We're talking about all settlement activity, yes, in the area across the line," he said, referring to neighborhoods in Jerusalem over the Green Line, or pre-1967 armistice line, in response to a question on where America's calls to halt construction in the settlements would be applied. Even so, Kelly had no immediate reaction to the Ministry of Housing and Construction's inclusion in the draft 2009-10 state budget of funds for the capital's Jewish Har Homa neighborhood or for one in the West Bank settlement of Ma'aleh Adumim. The ministry has earmarked more than NIS 200 million for the preparatory work and marketing of 1,210 apartments in the east Jerusalem Jewish neighborhood of Har Homa. The line item, which sets aside funds for the new apartment projects, can be found in the draft state budget now being debated in the Knesset. The money for these projects has been allocated at a time when tensions remain high between Israel and the United States regarding construction over the Green Line. Israel has always insisted that it has a right to build anywhere in Jerusalem because the state incorporated that land into the municipality and under Israeli law it is not considered part of the West Bank. But the international community considers Jewish neighborhoods in east Jerusalem to be settlements and has condemned any new Jewish construction there. Har Homa has been a particular sticking point because of its location on the city's southeast edge, next to the Palestinian city of Bethlehem. The Obama administration had not officially clarified its position on Jewish neighborhoods over the Green Line but within Jerusalem's municipal boundaries, but the Netanyahu government had been working under the assumption that US officials' call to halt even natural growth in the settlements did not refer to neighborhoods in the city, according to high-placed government officials. Kelly's comments Monday, however, made clear that Jerusalem was included, suggesting that efforts to finesse the disagreement could be further complicated. US President Barack Obama has called the settlements illegitimate and said that their expansion must stop, including natural growth. While Israel has expressed its willingness to take down unauthorized West Bank outposts, it has balked at halting natural growth in the settlements, arguing that communities need to continue to function normally. The dispute between the two allies has been unusually public, including messy wrangling over tacit arrangements sketched out far from the spotlight under the Bush administration. Though Israel in 2003 signed onto the US-sponsored road map peace plan, which calls for a settlement freeze including natural growth, government sources claim that Bush officials assented to construction continuing in settlements expected to remain with Israel under any peace accord with the Palestinians. The Obama administration, however, has contended that if such understandings were ever discussed in private, they were not resolved or made binding. Either way, as part of the Bush-era arrangements, Israel was supposed to stop providing financial incentives for Israelis to move to these communities. Though the new budget proposal might not subsidize individuals, it would provide money for some of the work on the 240 pre-approved homes in 2009 as well as marketing and preparatory work for 970 additional units in Har Homa, which still await approval from the Jerusalem Municipality. Unlike in the West Bank, construction in Har Homa or any other part of Jerusalem does not need the approval of the Prime Minister's Office or the Defense Ministry. The Prime Minister's Office had no comment on the earmarking of funds for Har Homa. The Jerusalem Municipality and the Construction and Housing Ministry could not be reached for a reaction. Peace Now's Hagit Ofran, who alerted reporters to the line item in the draft budget, said pushing ahead with Har Homa construction would be "unwise." "It risks our foreign relations and our international standing for another project which is totally leading us to a situation where we cannot have a two-state solution," Ofran said. The same 2009-2010 budget includes more than NIS 150m. for infrastructure work in the Ma'aleh Adumim settlement, east of the capital. The funds would create gardens, parks and roads for homes that have already been built in a neighborhood known as 07. Work has been ongoing in that neighborhood for the last decade, and some 3,100 apartment units have been built there. Some 400 apartment units have yet to be completed in that area. Ma'aleh Adumim Mayor Benny Kashriel said that private contractors had financed all the recent work on the project. The money from the ministry's budget for this project was a fiction, he said, in that it merely returned funds that were paid to the ministry by the contractors. But a ministry spokesman said money had been set aside by his office to complete the 07 project. Peace Now attacked the funding of the Ma'aleh Adumim project, saying it ran counter to the expectations of the United States and the international community that Israel would freeze settlement activity, which meant stopping any construction. From 2003 to 2007, some 2,000 new apartment units were completed in the Jerusalem suburb, which Israel has made clear it expects to keep in any final-status deal with the Palestinians. Rebecca Anna Stoil contributed to this report.