Israel's firebrand foreign minister has ordered that his country's embassies and consulates around the world display a photograph of Adolf Hitler with a Palestinian cleric.

It is part of a government push for the construction of a Jewish residential development in East Jerusalem.

The United States does not want the development to go ahead, but Israel is defying the pressure and making a point of showing that the land in Jerusalem's Arab quarter once belonged to the Grand Mufti of Jerusalem - a known Nazi collaborator.

In 1941 Hitler was photographed in Berlin with the then Grand Mufti of Jerusalem, Haj Amin al-Husseini.

At the time the Mufti led a number of violent campaigns against Jewish immigrants in what was then British-ruled Palestine, and he unsuccessfully sought Hitler's support for Arab independence and against Israel's creation.

But the Mufti was also the owner of a building in Arab East Jerusalem, which Israel annexed in 1967.

The site is now the centre of a dispute between Israel and the US, which is demanding a halt to plans to convert it into a Jewish apartment block.

Already Israeli Prime Minister Benjamin Netanyahu has rejected the US demand, saying "unified Jerusalem is the capital of the Jewish people and the state of Israel".

"Our sovereignty is non-negotiable. We cannot accept the idea that Jews will not have the right to live and buy in any location in Jerusalem," he said.

Now, Israel's ultra-nationalist foreign minister Avigdor Lieberman has waded into the dispute, dredging up the photograph of Hitler and the Grand Mufti to support the case.

He has had copies of the snap sent to about 100 Israeli embassies and consulates overseas so the world will know the truth and presumably ease pressure on Israel.

"It is not reasonable that we will discriminate against Jews in Jerusalem. Just like no-one thinks to make any remarks about Jerusalem Arabs who buy apartments in Jewish neighbourhoods," he said.

The US State Department put its case to Israel's ambassador in Washington, Michael Oren, at the weekend, telling him the development should not go ahead.

The international community regards the development as a Jewish settlement and therefore illegal, while Palestinians want East Jerusalem as their capital in any future independent state.

Senior Palestinian negotiator Saeb Erekat says the planned development "underminds the peace process".

"The Israeli Government continues its defiance of the international community, as the American administration calls to stop settlement activities including natural growth," he said.

"This undermines the peace process and this undermines the credibility of those involved in making the peace process continue."

As for the Grand Mufti, he failed miserably in his anti Zionist campaign. He fled Palestine a few years before it became Israel.

And 11 years after his death, his building site was sold to an American-Jewish millionaire.