Israel's ambassador to the US, Michael Oren, has said the row over new housing in East Jerusalem has triggered the worst crisis in US-Israeli relations in 35 years, despite attempts by Binyamin Netanyahu to project a sense of "business as usual". The question is whether the US will move beyond criticism to take punitive action if its demands are not met.

Israel is the largest recipient of US foreign aid – $2.4bn annually, rising to $3bn in 2011 – much of it for the military. No US president since George Bush Sr has tried to make aid to Israel contingent on the country's adherence to international law.

Oren, a historian before taking up Israel's most important diplomatic post, reportedly characterised the crisis as the most serious since a 1975 confrontation between Henry Kissinger and the prime minister, Yitzhak Rabin, over a US demand for a partial Israeli withdrawal from Egypt's Sinai peninsula.

President Gerald Ford then embarked on a "reassessment" of US policy, expressing "profound disappointment" over Israel's attitude in negotiations with Egypt. For six months the US refused to conclude new arms agreements with Israel. Rabin called it "one of the worst periods in American-Israeli relations".

Ford came under pressure from Jewish and pro-Israel groups at home and Israel eventually relented, allowing the pullback to take place. That paved the way for Anwar Sadat's initiative in 1977, which culminated in the Camp David accords brokered by President Jimmy Carter, and the 1979 peace treaty. It also led the way for a second disengagement of forces on the Golan Heights, an arrangement that has held to this day.

Other crises followed. In 1981 Israel and lobby groups worked hard but failed to torpedo a sale of US-made Awacs surveillance aircraft to Saudi Arabia, then as now a key Arab ally of the US. The Israeli prime minister, Menachem Begin expressed "profound regret and unreserved opposition" to the proposal, triggering rare anger in Washington, where the administration delayed the delivery of military aircraft to Israel. President Ronald Reagan suspended a strategic co-operation agreement after Israel annexed the part of the Golan Heights it still occupied.

In 1982 the US was accused of giving Israel a "green light" to invade Lebanon and destroy the PLO. Differences emerged over Israel's use of US-supplied military equipment and the siege of Beirut. Israel rejected Reagan's September 1982 Middle East peace plan, but that appeared to have no negative effect on US friendship and support for Israel. There were also ructions over the case of Jonathan Pollard, a US intelligence analyst who was convicted of spying for Israel in 1987.

The next low point came in 1991, in the wake of the Gulf war, when the Likud prime minister, Yitzhak Shamir, requested $10bn in US loan guarantees to help absorb Soviet and Ethiopian Jewish immigrants. There was a showdown when Bush withheld the guarantees in response to Shamir's intransigence over settlements in the occupied territories. The freeze ended in 1992 when Rabin's newly elected Labour-led coalition approved a partial housing construction freeze in the territories – the very same issue at the heart of the current US-Israeli friction.

In recent years US relations with Israel were probably at their smoothest and most uncritical during the two terms of President George W Bush, covering the 9/11 attacks and the invasion of Iraq. The US effectively backed Israel over the 2006 war against Hizbullah in Lebanon and the war against Hamas in Gaza in late 2008 and early 2009. But Bush urged Netanyahu's predecessor, Ehud Olmert, not to attack Iran and to give diplomacy and sanctions time to deal with the Islamic republic's nuclear programme. Both Israeli leaders seem to have agreed.

It is too soon to say whether US-Israeli relations will change significantly under Barack Obama. But the current level of anger in Washington suggests this could be the moment that they do.

• This article was amended on 16 March 2010 to make clear that George Bush urged Netanyahu's predecessor, Ehud Olmert, not to attack Iran.