Irving Moskowitz has come a long way since he began his medical career as an young internist in California 60 years ago. Shortly after earning his medical degree in 1952, he bought his first hospital. This transaction turned into a lucrative business of buying and selling hospitals, which earned him his first fortune.

As early as 1969, he began to turn his attention from hospitals to real estate of a different sort: holy real estate. He began to buy property for yeshivot in East Jerusalem. But he was running out of hospitals to sell and needed a new source of income to fund his dreams.

In 1972, he opened the first hospital in the small southern California town of Hawaiian Gardens and became a local hero. So in 1988, when the town faced the loss of $200,000 in revenue from the local bingo parlour, they turned to the orthodox Jewish doctor to take over the operation. The town agreed to accept 1% of gross receipts, and Moskowitz kept the rest – tens of millions of dollars. He never looked back, and his second fortune was guaranteed.

California law required that bingo be conducted by a non-profit organisation. So he shrewdly incorporated the Moskowitz Foundation, enabling his profits to be transferred directly to Israeli projects and largely avoid US taxes.

Over time, Moskowitz and other supporters of a far-right settler agenda developed a vision of "Judaising" East Jerusalem and its environs. They began after the 1967 war with a goal of repopulating formerly Jewish neighbourhoods, whose inhabitants had been expelled in 1948. The vision has gradually become more ambitious, seeking to dislodge Arab inhabitants from their traditional homes in villages like Silwan in order to transform Jerusalem into an exclusively Jewish city that can never be divided or shared with the Palestinians. Rabbi Haim Beliak, a pre-eminent Jewish activist and opponent of Moskowitz, goes so far as to call this "ethnic cleansing" of the indigenous population. Moskowitz's goal is to impose, through demography and population transfer, a political agenda on the state.

In 1985, Moskowitz purchased a political and real estate crown jewel: the Shepherd Hotel, for which he paid $1m. The property had been the headquarters of the Mufti, Haj Amin al-Husseini, a leader of Jerusalem Palestinians in the 1940s, who allied himself with the Nazis during the second world war. The state took control of the property decades ago and then sold it to Moskowitz. In one stroke, Moskowitz wrested from Palestinians part of their historic legacy and enabled the settler movement to make inroads into a new Arab neighbourhood.

Moskowitz plans to raze the hotel and construct residential units for like-minded ideological settlers. But for years, no Israeli government or municipal administration would to give him permission to build on the site. They understood the tinder-box nature of Moskowitz's proposal, remembering his last foray into sacred real estate: the Hasmonean Tunnel, a major Jewish excavation under the Al Aqsa Mosque in Jerusalem – the opening of which in 1996 led to violence that left 85 Palestinians and 16 Israelis dead.

The current rightist Israeli government and new nationalist mayor of Jerusalem are prepared to throw caution to the wind and push the Shepherd Hotel project through, however. Last month, the city of Jerusalem approved Moskowitz plans.

This is where the Obama administration comes in. They put up a big red stop sign in front of the development, telling Netanyahu in no uncertain terms that it should not begin. The US state department took the highly unusual step of summoning Israeli ambassador Michael Oren to tell him of its displeasure with the project.

Netanyahu's reply was bull-headed and typically disingenuous. There would be no limits on Jewish construction in "unified Jerusalem", he told his cabinet. "We cannot accept the fact that Jews wouldn't be entitled to live and buy anywhere in Jerusalem," Netanyahu said. "I can only imagine what would happen if someone suggested Jews could not live in certain neighbourhoods in New York, London, Paris or Rome. There would certainly be a major international outcry."

Bibi neglected to mention that no one in the world recognises Israel's annexation of East Jerusalem. Thus we're not talking about Jews being prevented from living in New York. Rather, we're talking about a hypothetical New York divided between two nations which are in a state of hostility. Naturally, one of the nations might want to regulate the settlement of citizens from the other in its neighbourhoods.

Based on a review of his foundation's tax forms, Moskowitz has sunk at least $70m as of 2002 into various settlement projects (not including his own personal fortune, which could add millions more). Besides him, there are a number of other American Jewish pro-settler groups raising millions of dollars for similar projects.

One of Moskowitz's favourite charities, to which he has given at least $5m, is American Friends of Ateret Cohanim, which runs a prominent East Jerusalem yeshiva. More importantly, its mission calls for rebuilding the Holy Temple and re-instituting animal sacrifices from the time of King David. The yeshiva trains those who would become priests if such a temple were ever built. If any of this came to fruition, it would likely ignite a holy war between Jews and Muslims.

I have urged the IRS to revoke the non-profit status of these entities. By granting tax-exempt status to the groups and their donations, the US taxpayer becomes an indirect subsidiser of the occupation. Denying non-profit status would strike a major blow against the American Jewish funding pipeline, which advances the most noxious projects of the extremist settler movement.

Given that Moskowitz is a political ally of Netanyahu, the Obama administration may have deliberately chosen a showdown over the Shepherd Hotel, since it knows very few American Jews (let alone Americans in general) will have any sympathy for such a provocative project to destroy a Palestinian historic landmark.