When the United Nations voted to partition Palestine in 1947, it identified land that was supposed to become an Israeli Jewish state, and a Palestinian Arab state. It also imposed a special status-corpus separatum, or separate body-for Jerusalem, ordering that Jerusalem remain under international, that is UN, jurisdiction, separately from the two new states that were to be created. The UN recognized the international significance of Jerusalem, whose holy sites are central to the tenets of the three Abrahamic monotheistic religions( Islam, Christianity, and Judaism), and viewed international jurisdiction as the best way to insure both protection of the holy sites and free access to all.
When the 1947-48 conflict ended, Israel controlled 78 percent of the territory of Palestine, but only the western half of Jerusalem, comprising largely the "new" city, and excluding both the Old City and the overwhelmingly Arab East Jerusalem. Israel promptly announced that Jerusalem would be its capital. East Jerusalem, like the rest of the West Bank, came under Jordanian administration.
In 1967, when Israel occupied the last 22 percent of the territory, including East Jerusalem, it immediately annexed East Jerusalem, and declared the "unification" of the city. Israel immediately began construction of huge settlement blocs in Arab East Jerusalem, and today more than 200,000 Israeli Jews live in East Jerusalem. But almost no country in the world, with the exception of a couple of small Central American nations, recognizes Jerusalem as the capital of Israel. All other embassies, including that of the U.S., are located in Tel Aviv.
The U.S. Congress has routinely voted to move the U.S. embassy to Jerusalem, and U.S. presidents have routinely campaigned for office on commitments to move the embassy and recognize Jerusalem as the capital of Israel. But no president has taken that step, recognizing such a move as a threat to regional stability. When Congress passed legislation requiring the relocation of the US embassy to Jerusalem, both Clinton and Bush II made use of the six month waiver clause in order to keep the status-quo.
Palestinians have long claimed Jerusalem as the capital of their would-be state. Their proposal is based on the idea of "one city, two capitals," in which the city would remain undivided, but there would be two national capitals within it-Israel's capital in West Jerusalem, Palestine's capital in East Jerusalem. The models of Italy and the Vatican, who both have capitals in Rome, as well as other historical examples, are often pointed to.
During the Oslo process, particularly in the Camp David summit of August 2000, the Israelis rejected the Palestinian proposal. Their offer was based on maintaining full Israeli sovereignty over all of Jerusalem. The Palestinians were offered a kind of municipal autonomy in Arab neighborhoods of East Jerusalem (excluding the Jewish settlements in East Jerusalem), including the right to fly a Palestinian flag from the mosques of the Haram al-Sharif in Jerusalem's Old City. Israel would also extend the municipal border of Jerusalem to encompass three small Palestinian villages east of the city. Israel would then allow the Palestinians to change the name of one of those cities, Abu Dis, to Al-Quds (the Arabic name for Jerusalem), and it would become the capital of Palestine. The problem, of course, was that changing the name of a tiny, dusty village to Al-Quds would not transform it into the city of Jerusalem-and calling it "the capital" wouldn't make it so.
International law governing the illegality of holding territory obtained through war, and a host of UN resolutions specifically calling for an end to Israel's occupation of East Jerusalem, require the creation of a Palestinian capital in Arab East Jerusalem. Israel's insistence on maintaining full sovereignty over the occupied Arab sector of the city violates those international decisions, particularly after the municipal borders of "Greater Jerusalem" were expanded from 4 square miles in 1967 to about 47 square miles at the expense of more than 20 Palestinian villages in the West bank.