Benjamin Netanyahu said the demand prevented peace negotiations
Israeli Prime Minister Benjamin Netanyahu has said he will not accept demands that Israel stop building in occupied East Jerusalem.
Demands to halt building in the part of the city that Palestinians want as the capital of their future capital "prevented peace", he told ABC news.
The comments by Israel's prime minister come just days after the US pressed Israel to do more to pursue peace.
Relations have been strained between the two allies recently, reports say.
Israel has occupied East Jerusalem since 1967. It annexed the area in 1981 and sees it as its exclusive domain. Under international law the area is occupied territory. Palestinians want East Jerusalem as the capital of a future state.
Mr Netanyahu said the Israeli government would discuss East Jerusalem as part of what he called "final discussions", but it could not be a precondition to direct talks.
"This demand that they've now introduced, the Palestinians, to stop all construction, Jewish construction in Jewish neighbourhoods in Jerusalem, is totally, totally a non-starter, because what it does is prevent peace."
He said Israel was right to refuse the demand, as Palestinians would never accept preconditions to talks demanded by Israel.
"You would rightly say: 'Ah, Israel is trying now to load the deck. To stack the deck. It's trying not to enter in negotiations,'" he said.
"I say let's remove all preconditions, including those on Jerusalem. Let's get into the room and negotiate peace without preconditions. That's the simplest way to get to peace."
He said direct talks were the only way to achieve peace.
But Palestinian leaders have said they will not enter any kind of negotiations with the Israelis until they show good faith by freezing the building of Jewish-only settlements in the West Bank and East Jerusalem.
Last year Mr Netanyahu agreed to a 10-month building pause in the West Bank, but refused to include East Jerusalem.
In March the Palestinians said they would not get involved in indirect or proximity talks after new building plans in a Jewish neighbourhood of Eat Jerusalem were revealed.
While US Vice President Joe Biden was visiting Israel, it was announced that 1,600 new apartments would be built in the Jewish Orthodox district of Ramat Shlomo.
The announcement has put US - Israeli relations under strain.
On Friday US Secretary of State Hillary Clinton again called on Israel to do more to pursue peace with the Palestinians, repeating the demand that settlement building be halted.
The secretary of state said supporting the Palestinian Authority led by Mahmoud Abbas was the best weapon to counter Hamas and other extremists.
Nearly half a million Jews live in more than 100 settlements in the West Bank, among a Palestinian population of about 2.5 million.
The settlements are illegal under international law, although Israel disputes this.
The Middle East quartet - the US, EU, UN and Russia - has called for a halt in settlement building and immediate final status negotiations to reach a comprehensive peace deal within two years.