WASHINGTON, D.C.: After meeting with Yasser Arafat in the Oval Office Monday morning, President Clinton came down on the side of the Palestinians in the dispute over Benjamin Netanyahu's plan to build a new Jewish neighborhood in East Jerusalem. "The important thing is on both sides to be building confidence and working together," Clinton said. "And so I would have preferred the decision not have been made because I don't think it builds confidence. It builds mistrust." Arafat said that the construction was designed "to squeeze and to isolate Jerusalem." Protesting Palestinians shut down shops and schools in a general strike throughout the West Bank, Gaza Strip and east Jerusalem. Netanyahu's announcement that the government would build in Har Homa came at a particularly delicate time as Israel prepares to withdraw troops from the West Bank. Although many in Israel have suspected that the timing was designed to take attention away from a growing judicial appointment scandal that threatens to bring down Netanyahu's government, the Prime Minister has other, more pressing political reasons to take a hard line on Jerusalem. The issue of Jerusalem has become the litmus test for conservatives already angered over Netanyahu's decision to withdraw from Hebron and the West Bank. Legally, as far as Israel is concerned, Har Homa is in Jerusalem, part of the city annexed in the 1967 war. But few countries recognize this claim, and the Palestinians say that East Jerusalem should be theirs. The issue is so involved and so fraught with emotion that the Oslo peace agreement stipulated that Jerusalem should be left to the very end of the peace process. While both the Clinton Administration and Palestinian leaders regard the move as a break of faith at a critical time, it may be a break Netanyahu was forced to make to preserve his increasingly precarious position.