JERUSALEM — JERUSALEM -- In a city long accustomed to huge squabbles over tiny plots of land, the latest front line is a one-time hotel now housing a few dozen offices.
A bit frayed around the edges, the once-grand stone building known as the Orient House hardly seems worth fighting for. Yet, Palestinians and Israelis arguing over its future say that nothing less than the fate of Jerusalem is at stake.
The building's first floor is the local headquarters of the Palestine Liberation Organization, but unofficially it has become the de facto seat of government for the would-be Palestinian state.
When foreign dignitaries come calling in Jerusalem, the PLO receives them at the Orient House. When Jerusalem Arabs want to protest or celebrate, they begin or end at the Orient House.
Israeli hard-liners want the place closed, and even Prime Minister Yitzhak Rabin has proposed legislation that could shut it down.
Palestinians, who have watched Israeli bulldozers and bureaucrats carve up mostly Arab East Jerusalem over the past 27 years, cling to it as the best hope for maintaining an official presence in the city.
The dispute is part of a larger fight for control of Jerusalem. Israel has ruled the whole city since capturing East Jerusalem in the 1967 Six Day War and maintains that it will never give an inch.
But with last month's signing in Cairo of an agreement for Palestinian self-rule in the Gaza Strip and the West Bank town of Jericho, the Palestinians saw hope for someday taking back Jerusalem.
The question is so volatile that the agreement postponed for two years any discussion of Jerusalem. In the meantime, both sides want to establish themselves as firmly as possible on the east side, building by building, block by block.
The reigning euphemism for this strategy is "establishing facts on the ground," and each side accuses the other of the practice in the debate over the Orient House
Israel would seem to have the upper hand. Bulldozers periodically raze Arab homes deemed "illegal dwellings," and zoning restrictions limit Arab construction to a few small buildings.
Israelis build high-rise apartments between and around Arab neighborhoods, chopping the Arab community into an overcrowded chain of islands. The city's new mayor, right-wing hard-liner Ehud Olmert, has vowed to push these policies further.
But several days ago, the government made public a letter that for the first time seemed to concede ground in Jerusalem to the Palestinians. Foreign Minister Shimon Peres wrote the letter in October to then-Norwegian Foreign Minister Jorgen Holst, who had helped bring together negotiators for Israel and the PLO.
"I wish to confirm that the Palestinian institutions of East Jerusalem and the interests and well-being of the Palestinians of East Jerusalem are of great importance and will be preserved," Mr. Peres wrote.
Disclosure of the letter unleashed loud denunciation from Israeli hard-liners, such as Likud Party Chairman Binyamin Netanyahu.
"We thought that Jerusalem was above any political argument," he said at a protest demonstration, "but now we see . . . that the government is willing to discuss its partition."
Mr. Rabin's government scurried to make an orderly retreat. The prime minister said that the assurances had nothing to do with places such as the Orient House, and he stressed that the Palestinians would have to confine any self-rule activities to Jericho and Gaza.
Does that mean the government will close the Orient House? Mr. Rabin was asked by Israel Radio.
"We will examine that step," he answered. "The attorney general has already been working on that for two weeks."
Mr. Rabin also threatened Jerusalem's ranking PLO member, Faisal al-Husseini, with expulsion if he didn't curb his activities at Orient House. "If Faisal Husseini wants to be a member of the Palestinian Authority [for self-rule], he will need to work in Jericho," Mr. Rabin said. "If he wants to continue to work in Jerusalem, he cannot be a member of the Palestinian Authority."
Mr. Husseini's response was to declare, "The battle for Jerusalem has begun."
Meanwhile, the Palestinians have continued setting up more offices in East Jerusalem, openly defying the Israelis to do anything about it.
One is the Palestinian Economic Development Council, which is charged with scraping together money to run the new government in Gaza and Jericho. The other is the Palestinian Independent Commission for Citizen's Rights, a watchdog organization to guard against abuse of power by Palestinian officials.
Hanan Ashrawi, the prominent Palestinian peace negotiator who heads the latter group, said the headquarters would remain in Jerusalem, no matter what. "We do not feel we have to account to the Israelis for this institution," she said.
Such talk frightens some Israelis, partly because they hear within it echoes of their own past. They, too, made their case for statehood acre by acre, until there were enough "facts on the ground" to convince the rest of the world to sanction the formation of the Jewish state in 1948.