The statement by Haim Ramon, the minister in charge of Jerusalem, confirmed Palestinian claims that demographics - and not only security - determined the barrier route.
The plan would separate 55,000 Palestinians from the city both sides want as a capital - bringing to the fore an explosive disagreement over who controls the holy city and where its boundaries should be. The government approved its final details Sunday.
The 40-mile Jerusalem segment is part of a complex of walls, trenches, fences and electronic devices Israel is building along the entire West Bank, dipping into the territory in some places to enclose main settlement blocs. Palestinians see the project as a land grab, not a security measure.
Palestinian Foreign Minister Nasser Al Kidwa called Monday for stepped-up street protests against the barrier. Marking a year since the world court in the Hague handed down a nonbinding decision that deemed the barrier illegal and ordered it torn down, he said Palestinians should organize for a "higher level of daily confrontations against the wall."
Opponents and supporters demonstrate almost daily at West Bank sites where its construction uproots orchards or cuts Palestinians off from their farmland or services.
Israel began building the barrier more than two years ago at the height of a wave of Palestinian suicide bombings. More than 100 bombing attacks took the lives of nearly 500 Israelis during four years of conflict.
In Jerusalem, 170 people have been killed in 22 suicide bombings since 2000.
But Ramon said demography was also a main factor for the barrier route in Jerusalem. It encloses Maaleh Adumim, a settlement with nearly 30,000 Jews, while excluding four Arab sections, including a refugee camp, with 55,000 Palestinians altogether. Of Jerusalem's 700,000 residents, about a third are Palestinian.
Besides keeping suicide bombers out, the route of the barrier "also makes Jerusalem more Jewish," Ramon said. "The safer and more Jewish Jerusalem will be, it can serve as a true capital of the state of Israel."
Palestinian negotiator Saeb Erekat objected.
"The whole idea is to get as many Palestinians outside Jerusalem, and get as many Israelis (as possible) inside," he said. "This is determining the fate of Jerusalem before we begin negotiations."
Erekat said he would raise the issue with international envoys visiting the region this week, including senior State Department official David Welch.
Zeev Boim, Israel's deputy defense minister, denied the barrier route was dictated by demographic considerations.
"The fence was put up because of security needs, to stop terrorism," he told Israel Army Radio.
Ramon said it was a "mistake" to enclose more than a dozen Arab villages in the city limits drawn after the 1967 war, when Israel captured the Arab section of Jerusalem along with the West Bank and Gaza.
No other nation recognized Israel's annexation, including the Old City, with key sites holy to Christians, Muslims and Jews.
In peace talks in 2000, Israel offered to hand the Arab neighborhoods over to Palestinian control while keeping the Jewish neighborhoods, but no agreement was reached. After violence erupted in September 2000, Israel took the offer off the table.
Visiting European Union foreign policy chief Javier Solana criticized the Jerusalem barrier.
"We think that Israel has a right to defend itself, but we think that the fence, when it is done outside the territory of Israel, is not legally proper and it creates also humanitarian problems," he said after meeting with Israeli Foreign Minister Silvan Shalom.
In another development, Vice Premier Shimon Peres said Monday that Israel will seek $2.2 billion in additional U.S. aid for the summer's withdrawal from Gaza and four West Bank settlements. The request was to be made later Monday in a meeting between Israel and U.S. officials in Washington.
Israel is already the biggest recipient of U.S. aid, getting an annual $2.3 billion for economic and military purposes. But Peres said it needs more money to remove 9,000 settlers and develop the Galilee and Negev Desert regions for resettlement.