|UN chief tells Al Jazeera Israeli settlement building has created 'gap of trust'
The reportedly tense meeting was the first between the two leaders since relations between the two allies were soured by the Israeli announcement that 1,600 settler homes were to be built in occupied East Jerusalem.
Netanyahu delayed his departure from the US for further meetings with US officials on Wednesday as tension over the settlements lingered between the allies.
Obama's Middle East envoy, George Mitchell, met Netanyahu at the prime minister's hotel on Wednesday, and Israeli and US officials convened on the sidelines, but both sides gave no public sign of a breakthrough on the sensitive issue.
US officials have tried to get Israel to agree to suspend further Jewish home construction in East Jerusalem and to consent to discuss core issues such as borders and the status of Jerusalem in US-brokered "proximity" negotiations with Palestinians.
More building permits
But the meetings have been overshadowed by news that more building permits had been issued for the disputed city.
Just hours before the meeting between Obama and Netanyahu took place, the Jerusalem municipality said on its website that final permission had been granted for the construction of 20 housing units, shops and a carpark at the Shepherd hotel compound in Sheikh Jarrah, a Palestinian neighbourhood in East Jerusalem.
Netanyahu's office said the prime minister heard about the media reports of the project's approval half an hour before visiting the White House and did not know about it beforehand.
However, the building permit was reportedly issued last Thursday, three days after the necessary fees were paid, meaning the final approval was given before Netanyahu began his visit to Washington on Monday.
Jerusalem city hall said media reports on the subject were "distorted" and meant to provoke during Netanyahu's Washington trip.
"Once the construction permits have been paid for they are automatically issued," a spokesman said on Israeli public radio.
When the project was approved in July, Washington demanded it be halted and summoned Michael Oren, Israel's ambassador to the US, to be reprimanded.
PJ Crowley, the US state department spokesman, told The Associated Press news agency that the US and Israel were engaged in "give and take" after Washington was angered by the settlement announcement made during a visit by Joe Biden, the US vice-president.
"We are not going to talk about the precise steps both sides have to take. We will continue to discuss those steps privately," he said.
Netanyahu has shown little sign of giving in to US pressure over the settlement issue during his three-day US visit.
"If the Americans support the unreasonable demands made by the Palestinians regarding a freeze on settlements in East Jerusalem and the West Bank, the peace process risks being blocked for a year," the Israeli media quoted him as saying earlier on Tuesday."
Those remarks came after a defiant speech to the American Israel Public Affairs Committee (Aipac) on Monday.
"The Jewish people were building Jerusalem 3,000 years ago and the Jewish people are building Jerusalem today," Netanyahu said.
|Binyamin Netanyahu strikes a defiant tone in the face of US criticism over settlements
"Jerusalem is not a settlement. It's our capital."
Alon Liel, a professor of international relations at Tel Aviv University and the former head of Israel's foreign ministry, said "a very crucial moment" in the Israeli-Palestinian conflict has been reached.
"The international community as a whole has reached a conclusion that if we don't freeze settlements now, and establish a Palestinian state now, it will never happen," he told Al Jazeera.
"[Netanyahu is] the prime minister that has to decide if Israel wants to go on settling.
"It's not only the relations with the United States that is on stake. The Quartet is united on this issue and the Quartet [of Middle East mediators] is the world ... It's a decision if Israel is going to be internationally isolated or not.".
Israel has repeatedly said that it sees Jerusalem as the capital of a Jewish state and will not allow it to be divided.
The Palestinians want the predominantly Arab east of the city, which was illegally annexed by Israel after the 1967 Middle East war, as the capital of any future independent state.
The Palestinians retreated from their agreement to begin indirect talks two weeks ago after Israel announced its plans to build 1,600 homes for Jews in an area of the occupied West Bank annexed to Jerusalem.