The light in the night sky near Bethlehem this Christmas will be no heavenly portent but a safety beacon on a crane in a nearby Jewish community so controversial it threatens to derail the Israeli-Palestinian peace process.

Har Homa, largely overlooked on the world stage since construction began roughly ten years ago, has surged up the international agenda since Israeli authorities decided this week to build 307 new homes there.

	Arab workers build new apartment blocks in the Israeli neighborhood of Har Homa in the eastern part of Jerusalem

The Palestinians and much of the international community believe the decision violates Israel's recent undertaking not to increase the Jewish settler community on occupied Palestinian land.

Israel counters it can do what it likes with Har Homa as it lies not in the occupied territories but within the municipal boundaries of Jerusalem which is not bound by the international agreements applicable to the territories.

Whatever the legal outcome of the row, Har Homa has come to encapsulate the essence of 60 years of Israeli-Palestinian conflict as two people lay claim to one piece of land.

There was little sign of the gathering diplomatic storm during a visit on Wednesday to the orderly little town of pill-box style apartments built around a hilltop that dominates the short road between Bethlehem and Jerusalem.

Jewish children enjoyed some early winter sunshine as they spent the last day of the Hanukkah holiday playing quietly in small parks near the ruins of a Byzantine fort that once crowned this strategic height.

Further down the hillside, heavy plant threw up plumes of dust as building continued apace on new apartment blocks.

"Like a lot of places in Israel the history of this place is not simple but as one of the longest residents here I have come to be convinced of our moral right to be here," said Reuven Levy, 39, a local estate agent.

"So while I know about all the international fuss, I can honestly say it really does not bother me."

He pointed out that when Har Homa was created in the late 1990s, there were no Arabs or, indeed Jews, who lost their homes.

And 70 per cent of the land was already owned by Zionist Jews, and only 30 per cent by local Arabs.

"It was forest back then," he said.

"I remember as a child that we used to look into this forest and while environmentalists might complain about the loss of trees, nobody was evicted so Har Homa could be built.

"And you have to remember that Jerusalem is just a few minutes away and it is a city which has become very crowded so what is wrong in developing open spaces like this?"

This argument does not convince Palestinians who argue the Arab-owned land was undeveloped forest precisely because the state of Israel had forbidden Arab development since taking control of the area in the 1967 war.

They complained Har Homa was also built for strategic reasons deliberately to block the Arab land corridor between Bethlehem and the Old City of Jerusalem.

Yoel Berkowitz, a 33-year-old journalist who edits Har Homa's newsletter, said during the Second Intifada it was possible to hear clashes between the Israeli army and Palestinian militants in Bethlehem.

"But most of the 15,000 or so people who live here regard themselves as Jerusalemites," he said.

"We might be on the edge of the city but we are still in the city boundaries."

Har Homa is an exclusively Jewish community and while it has a current population of 2,600 families, there are plans to expand eventually to 9,000 families.

Condoleezza Rice, the American secretary of state, this week used uncharacteristically forthright language in criticising the decision to build the next 307 housing units saying it "does not build confidence" at a crucial moment in the peace process.

Ban Ki-moon, the United Nations secretary general, described the decision as "unhelpful" and the European Union issued a statement "noting with concern" the development.

The current Jewish residents of Har Homa hope their community will last longer than the Byzantine fort on top of the mountain.

For this to happen both sides in the Israeli-Palestinian negotiations will have to somehow tackle the sensitive issue of accommodating two traditionally hostile neighbours in one increasingly crowded neighbourhood.