Demolitions of illegally built houses have caused tension in the past
The US administration has warned against an Israeli government announcement it could continue to demolish buildings in East Jerusalem.
An unnamed Obama administration official told Israeli media the US "calls on both sides to avoid inflammatory actions in Jerusalem".
On Wednesday an Israeli minister said the demolition of illegally built homes of Arabs could continue.
Last week indirect talks began between Israelis and Palestinians.
The US State Department official was quoted as saying that they hoped the indirect negotiations, known as "proximity talks", would lead to direct negotiations between the parties and steps that would "resolve this issue once and for all".
"If either side takes significant actions during the proximity talks that we judge would seriously undermine trust, we will respond and hold them accountable and ensure negotiations will continue," the official said.
On Wednesday Interior Minister Yitzhak Aharonovitch had told Israel's parliament, the Knesset, that there was no government order barring the demolition of homes illegally built by Arabs in East Jerusalem.
He said that demolitions had been postponed in recent months to avoid harming the attempts by US Senator George Mitchell to reopen indirect talks.
"As of right now there is no directive for police not to implement demolition orders," he said.
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.
According to a UN report, Palestinians wanting to build a home can seek permission to do so only in a small area. It comprises about 13% of East Jerusalem and is already densely populated.
As a result at least 28% of all homes have been built illegally.
Out of the quarter of a million Palestinians living in East Jerusalem, the UN says, 60,000 are at risk of having their homes demolished by the Israeli authorities.
POINTS OF TENSION IN JERUSALEM
1 Gilo: 850 homes approved for publication and planning objections in Nov 2009
2 Pisgat Zeev: 600 homes approved for publication and planning objections in Jan 2010
3 Sheikh Jarrah: Municipality approves the building of 20 new apartments on the site of an old hotel
4 Ramat Shlomo: 1,600 homes approved for publication and planning objections in Mar 2010
5 Silwan: Demolition orders on 88 Palestinian homes built without difficult-to-get permits - Israel planning controversial renewal project
6. West Bank barrier: Making Palestinian movement between West Bank and Jerusalem harder - Israel says it is for security