In his first public comments on the matter, Prime Minister Benjamin Netanyahu told his Cabinet that Israel and the U.S. can work out their differences.
"The relationship between Israel and the U.S. is one between allies and friends, and it's a relationship based on years of tradition," Netanyahu said. "Even if there are disagreements, these are disagreements between friends, and that's how they will stay."
The U.S. has criticized Israeli construction in east Jerusalem - the section of the holy city claimed by the Palestinians. It has asked Israel for gestures toward the Palestinians to help relaunch peace talks, which were about to start earlier this month when the latest spat over settlements broke out.
The planned negotiations were thrown into doubt after Israel announced plans to build 1,600 new apartments for Jews in east Jerusalem. Israel made the announcement while Vice President Joe Biden was visiting, drawing sharp condemnations from Washington and calls to cancel the construction plans.
Netanyahu, who has consistently rejected calls for any halt to building in Jerusalem, got a chilly reception at the White House last week. He gave no sign of giving in to the U.S. demand or resolving the dispute by the time he left.
Ties between Israel and the U.S. are more tense than they have been in years.
Netanyahu discussed the matter with his Cabinet ministers at their weekly meeting Sunday, and told reporters before the meeting that he had taken "certain steps in order to narrow the gaps."
No details from the reportedly tense Obama-Netanyahu meeting have been made public. The administration's precise demands on Israel and what Israel has offered in return have also remained under wraps.
Defense Minister Ehud Barak, who is a member of the moderate Labor Party, told reporters Sunday that Israel must make its own decisions relating to its vital interests. But he added that "we cannot ever lose touch with the importance of the relations and the ability to act in harmony and wide unity of purpose with the United States."
In Washington, David Axelrod, a top adviser to President Barack Obama, said Sunday the relationship with Israel remains strong. However, he gave no indication the sides were any closer to resolving their dispute.
"Israel is a close, dear, and valued friend of the U.S., a great ally. That is an unshakable bond," Axelrod told CNN. "But sometimes part of friendship is expressing yourself bluntly."
Palestinian officials said they have been told by U.S. officials that Washington is still pushing Netanyahu for further concessions and awaiting his response. The Palestinian officials spoke on condition of anonymity because they were discussing a sensitive diplomatic matter.
Israel captured east Jerusalem from Jordan in 1967 and later annexed it, a move that was never recognized by the international community. The current tension surrounds Israeli construction in the Jewish neighborhoods it has built in east Jerusalem. The international community considers these neighborhoods to be illegal settlements, no different from the more than 120 Jewish settlements that dot the West Bank.
Netanyahu says that Israel will retain its east Jerusalem neighborhoods in any peace deal, so building there does not harm the chances for peace.
The Israeli construction plans and deadlock in peace efforts have helped fuel recent Palestinian protests in the West Bank and east Jerusalem.
On Sunday, Israel said it was imposing a closure on the West Bank as a security measure for the duration of the weeklong Passover holiday. The routine measure, which was to begin at midnight, bars almost all Palestinians from entering Israel.
