DEBORAH AMOS, host:

And now to the Middle East. An unpopular war, an unhappy electorate, and charges of corruption has given Ehud Olmert a dramatic two years as prime minister of Israel. After insistent calls for his resignation, Olmert gathered reporters yesterday to make an announcement and a case for his innocence. He spoke through an interpreter.

Prime Minister EHUD OLMERT (Israel): (Through translator) Claims against me are taking place at the moment even by those people who care about the state and its image, and they create a question that I cannot repel. What is more important: my personal justice or public interest?

AMOS: Olmert chose public interest. He said his plan is to step down after his Kadima party chooses a new leader in mid-September. Back in Washington, Secretary of State Condoleezza Rice met with visiting Israeli and Palestinian officials. She said Olmert's decision would not affect chances of reaching a peace agreement by the end of the year. That's the Bush administration's goal.

It was set out in a meeting in Annapolis, Maryland last fall. But both Israelis and Palestinians say an ongoing dispute over Jerusalem has stalled those negotiations. NPR's Eric Westervelt reports from Jerusalem on why.

ERIC WESTERVELT: Arab residents of the East Jerusalem neighborhood of Beit Hanina are seething. Ibrahim Kawasmee shakes his index finger at the massive pile of cement and metal that used to be his neighbor's four-story home. Remnants of crushed furniture can be seen poking out of the rubble. On Monday, Israeli security forces blew up the house after declaring that it was expanded without proper planning permission. Until late Monday, seven families had called the four-story apartment building home.

Mr. IBRAHIM KAWASMEE: (Through translator) This is God's warning from the holy Koran: Israelis, you all will be punished for committing your huge sins on this land.

WESTERVELT: Israeli officials say they demolished the home because of a zoning violation. They call it a legal demolition of an illegally expanded building. The owner, Majid Abu Eesha, sees it as an attempt to expel Arabs from the east side of the city that Israel captured in the 1967 war.

Mr. MAJID ABU EESHA (Building Owner): (Through translator) This is a message to all East Jerusalemites. They don't want any Arabs here. They want a pure Zionist Jerusalem.

WESTERVELT: Wearing a stained, badly ruffled suit, and weary from lack of sleep, Abu Eesha stands in his yard near the pile of debris and defiantly vows to rebuild.

Mr. ABU EESHA: They do it every day. I will build every day. I stand, I stand, I stand, my son stands. We die here. We don't move from here. They should leave; not we, not us. We are staying here.

WESTERVELT: The perception that the house demolitions amount to a Zionist land grab is widespread among Arab East Jerusalemites. Palestinians complain bitterly that Israel unfairly denies them building permits while encouraging Jews to build here.

After the '67 war, Israel annexed East Jerusalem in a move that most of the international community does not recognize. Palestinians want the area as the capital of a future state. The conflicting claims to Jerusalem remain the toughest problem to resolve in any peace talks. And Prime Minister Olmert this week said there is no practical chance of reaching a comprehensive understanding on Jerusalem this year.

For Palestinians, there's no chance of reaching a peace deal without an understanding on Jerusalem.

Mr. HATEM ABDUL KADER (Palestinian Advisor): And I think to Jerusalem the door of the peace or the door of war.

WESTERVELT: That's Hatem Abdul Kader, the Jerusalem affairs adviser to Palestinian Prime Minister Salam Fayyad.

Mr. ABDUL KADER: No peace without Jerusalem. The Israelis know that Jerusalem is part of the Palestinian territories, and no Palestinian state without Jerusalem as its capital.

WESTERVELT: In a worrying new trend for Israelis, all four attacks in the Holy City this year were carried out by East Jerusalem Arabs. Those attacks left 12 Israelis dead and dozens more wounded. Police believe all four attackers acted alone. These so-called lone wolves don't have any discernible link, police say, to militant Palestinian groups.

Mr. MENACHEM KLEIN (Political Scientist): The four attacks shows that the residents of East Jerusalem, the Palestinians, are boiling. The ground is boiling and shaking.

WESTERVELT: Israeli political scientist Menachem Klein believes the government's policies on greater Jerusalem are exacerbating tensions. Jewish settlements on the edge of the city are expanding, and more Jews are moving into East Jerusalem.

And Klein points out that the massive security barrier and wall Israel is constructing has strengthened its control of greater Jerusalem while cutting off Arab districts of the city from the West Bank.

Mr. KLEIN: What we see recently, Israel does not want to stop at the municipal boundaries of Jerusalem, the area that Israel annexed immediately after '67 war. Israel wants to annex de facto all the land that the barrier takes in Jerusalem, greater Jerusalem, which is about four percent of the West Bank, instead of about one percent that Israel took in '67.

WESTERVELT: Klein argues the Israeli policies for greater Jerusalem have created huge demographic and security challenges for the Jewish state, problems that he says are undermining talks with the Palestinians.

Eric Westervelt, NPR News, Jerusalem.

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