Both sides claim the city as their capital, and both insisted on being Clinton's sole escort on a walking tour of Christian, Moslem and Jewish sites in the walled Old City.
The president arrived in Israel Thursday directly from Syria, saying the region stands "on the threshold of a new era of peace."
The president, beaming, was greeted by hundreds of Israeli leaders, soldiers and well-wishers as he stepped onto a red carpet at an airport near Tel Aviv, after landing shortly before 4 p.m.
He was also warmly greeted in Jerusalem, where 15,000 Israelis lined the sidewalks as his motorcade headed toward the King David Hotel.
An Israeli military band played the U.S. national anthem and then "Hatikva," the national anthem of Israel. Clinton then reviewed an Israeli honor guard.
The president exchanged warm greetings with virtually the entire Israeli government on a receiving line headed by Prime Minister Yitzhak Rabin. The band played a rendition of the Hebrew prayer "And He Shall Make Peace."
Jerusalem's mayor, Ehud Olmert, said he was sorry the planned tour of east Jerusalem's holy sites was scrapped. The Palestinians claimed a diplomatic victory.
However Clinton's wife Hillary, who arrived in Israel before her husband and was not bound by protocol, went to the Old City to see the Western Wall, Judaism's holiest site.
When the tour first turned up in unofficial Israeli schedules of Clinton's overnight stay in Jerusalem, it caused surprise. No serving U.S. president has ever visited the holy sites, lest he be seen as recognizing Israeli sovereignty over east Jerusalem, whose population is largely Moslem.
Olmert said the Israeli Foreign Ministry told him this was Clinton's wish, and that he should plan to accompany the president.
The sites in question, a short walk apart, are the Church of the Holy Sepulcher, over Christ's reputed tomb; the Western Wall, the only remaining part of the ancient Jewish Temple; and the domed Moslem mosques on the Temple Mount, or Haram al-Sharif.
The problem is that they are in the walled Old City in the Arab sector of the city, which Israel captured in the 1967 war and annexed as part of its capital.
The West, including the United States, does not recognize the annexation, and the Palestinians claim the sector as their capital.
The Americans don't recognize the Jewish sector as Israel's capital either, and keep their embassy in Tel Aviv. But U.S. heads of state always stay in Jerusalem.
The whole issue of Jerusalem's status is so sensitive that Israel and the Palestine Liberation Organization have decided not even to discuss it until they reach the final stage of their peace negotiations.
The Palestinians are angry that the Israel-Jordan peace treaty signed Wednesday recognizes Jordanian King Hussein as a custodian of the city. The PLO and Jordan have appointed rival muftis, or religious leaders, in Jerusalem, and wrangled over which one would meet Clinton. In the end they decided that neither should.
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