JERUSALEM—The mayor of Jerusalem is offering 120 Palestinian families in a jumble of houses scheduled for demolition a deal he believes they can't refuse: new apartments atop shops and restaurants, a day care center, boutique hotels and a huge park. Tourists and income will flow. It is—as the mayor likes to say—win-win.

But as Ziad Kawar, a lawyer representing the families, likes to say, this is Jerusalem, not Zurich. Here there seems only to be win-lose.

“;The whole situation is impossible,”; Kawar said. “;It is a political problem, and I am being asked to treat it like a legal one. I am walking between the raindrops.”;

The negotiations offer a window into the Israeli-Palestinian conflict—the mistrust, the missed signals, the clash of cultures, the unequal power balance. The mayor, Nir Barkat, says he has the interests of the Palestinians in mind. They say he is lying.

The residents say they have been living there for decades. Barkat says they are lying. If the two sides reach agreement soon, it will be a miracle. If they do not, tensions will accelerate.

Barkat, a secular rightist who made a fortune in the high-tech industry, says the proposal for the neighborhood, known as Al Bustan near the walled Old City, is a pilot for what he hopes to do throughout East Jerusalem. “;It can be a mini-Tuscany,”; he said in an interview.

He added that with or without the cooperation of the residents, the plan would be put into effect. “;They think what I say is not what I mean,”; Barkat said. “;They are not used to a professional rather than a political approach.”;

In fact, no utterance escapes politics. All labels and names here are contested. The mayor calls the neighborhood not by its Arabic name of Al Bustan but by a Hebrew one—Gan Hamelech, or the King's Garden, a reference to the spot some believe King David wrote psalms. He speaks of “;illegal”; housing. The Palestinians—indeed the rest of the world—do not recognize Israel's sovereignty over East Jerusalem. He wants them to yield their houses. They say they own the land.

“;For us, the occupiers cannot tell us what is legal and illegal,”; protested Jawad Siyam, a community activist.

Barkat says he has no hidden agenda. But on either side of the Bustan neighborhood there are disputes over recent Jewish settlement, and residents fear a pincers operation.

Al Bustan is a section of Silwan, and in northeast Silwan there is a seven-story settler building that the courts have ordered evacuated. Barkat wants to allow the settlers to stay and increase the height of Palestinian buildings so that both benefit. To the west, also part of Silwan, is what has been recently called The City of David, an archaeological park with a Jewish theme run by a settler group.

Barkat says his plan has nothing to do with the City of David or the settlers. But few Palestinians believe him.

Ahmed Rweidi, a Palestinian Authority official speaking on Palestinian radio, accused Barkat this week of a plan for “;ethnic cleansing”; because he wants to demolish houses in Al Bustan. One of the neighborhood's residents, Abdulkarim Abu Sneineh, accused Barkat and the Israeli government of wanting to isolate the nearby Aksa Mosque, Islam's third-holiest shrine, to build a Jewish temple. The threat of demolitions in Bustan is part of a larger issue drawing international concern—Palestinians being driven from East Jerusalem and replaced by Jews.

But Barkat says the trend is actually the opposite. Israeli Jews are leaving Jerusalem for parts of Israel where incomes are higher. By contrast, he says, Palestinians are migrating from the West Bank into Jerusalem for economic reasons. Nonetheless, the Bustan plan, he says, is about improving the city, not the demography.

“;The mayor thinks he will come with American ideas and they will hug him,”; said Efrat Cohen-Bar, who works for Bimkom, an Israeli group focused on human rights and urban planning. “;He chose a spot for his pilot where there is a war going on.”;

Since taking office a year ago, Mayor Barkat has vowed to oppose any division of Jerusalem in any deal with the Palestinians. But he said he would be the mayor of all. That includes the city's quarter million Palestinians, who live with cracked, litter-strewn streets, too few schools and the fear that many of their houses will be taken down. There are 20,000 illegal Palestinian housing units in East Jerusalem, according to Bimkom.

For the past year, the mayor has had architects and urban developers work on a new approach to Al Bustan at an expected cost of between $50 million and $100 million, to be raised partly abroad. He chose Al Bustan, he said, because nearly every house there dates from the past 20 years and was built without a permit, and because it has high tourist potential.

The area was historically an uninhabited green belt with annual winter flooding, fixed in the early 1990s. As the other parts of Silwan grew crowded, residents built in Al Bustan. The municipality looked the other way.

Barkat wants to return at least half of the neighborhood to its original state of parkland. He wants a place where visitors can contemplate the kings of Judea, with water flowing along it to the Kidron Valley nearby. There would be small hotels, lovely restaurants. About 8 million visitors go to the holy sites every year, he said. He figures at least half a million of them can be lured to Gan Hamelech.

“;In high tech, we say the first million is impossible,”; Barkat said. “;To go from one million to 10 million is extremely difficult. But to go from 10 million to 100 million is inevitable. For East Jerusalem, Gan Hamelech is the first million.”;

Fakhri Abu Diab, an accountant, said that he had three separate municipal demolition orders against his house. He said he was willing to beautify Al Bustan, increase the greenery and build hotels, but not at the expense of losing his house for an apartment. In the end, he and the other residents may make a deal with the city. But right now, tensions are high.

“;I want my grandchildren to play soccer with the mayor's grandchildren,”; he said. “;But when he goes home to sleep at night, he rests calmly knowing no one is going to take his home. I don't have that comfort. I am not against history, but what is more important, history or my home?”;