Qatar has proposed the creation of a $1bn Arab fund for occupied East Jerusalem, which Palestinians say should be the capital of an independent state under any peace deal with Israel.
Sheikh Hamad bin Khalifa Al Thani, Qatar's emir, offered on Tuesday to contribute $250m to the fund, and acknowledged that past promises to aid the Palestinians have gone unfulfilled.
Arabs fear that Israeli settlement building on land captured in the 1967 Middle East war, including East Jerusalem, has made a two-state solution backed by the US unfeasible.
The emir called for the setting up of the fund to protect the "Arabness of Jerusalem" at an Arab League summit in Doha, the Qatari capital, that focused on the crisis in Syria and stalled Israeli-Palestinian peace efforts.
"We are all obligated to work to defend Jerusalem ... the Arab states must swiftly and seriously act," he said.
"Palestinian, Arab and Islamic rights in Jerusalem cannot be compromised. Israel must realise this."
The fate of Jerusalem has proved one of the thorniest sticking points in past Middle East peace negotiations.
Citing Jewish Biblical ties to the city, Israel annexed the Arab eastern sector and its surroundings in 1980 in a move rejected by the UN Security Council.
The Palestinian Authority (PA), which administers parts of the occupied West Bank, is in deep financial crisis.
Last week, the US promised $500m in aid to the PA, and Israel pledged to resume transferring $100m in monthly tax revenue it collects on the Palestinians' behalf.
The emir did not say if the proposed Arab fund would be channelled to the PA, whose writ does not run in East Jerusalem.
About 200,000 Israelis live in the annexed part of Jerusalem, including more than 1,000 in and around the mostly Arab Old City.
Palestinian officials are sceptical of Arab aid pledges, as few Arab countries carried through on promises last year to cover a Palestinian funding gap aggravated by Israeli sanctions.
Last year, Arab donations, including $200m from Saudi Arabia, constituted almost half the PA's foreign aid, with the US and EU providing around $330m.
"As we've have seen many times before, unfortunately decisions in Arab summits often do not materialise on the ground," Ghassan Shaka, a senior member of the Palestine Liberation Organisation, said.
"Financing is just a means, political help is the important thing. The Arab world must convince and apply pressure so the world knows what's required for peace."