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More than one and a half thousand Palestinians living in East Jerusalem have been told they will be evicted from their homes.

Israel has ordered 88 Palestinian homes to be demolished under the premise that they were built illegally and without permits in East Jerusalem's Silwan neighborhood.

But under international law, Israel's claim to the neighborhood itself is illegal since it is not recognised by world powers as part of the Israeli capital.

In forming Israel's next government, Benyamin Netanyahu, who opposes the two-state solution and supports the expansion of West Bank settlements, hopes to stabilise a coalition government with the support of Tzipi Livni's centrist Kadima party.

If he fails, he will be forced to rely on a narrow coalition of right-wing and religious parties that may mean more Palestinians evicted from their homes illegally.

The EU has voiced concerns that these developments may halt peace talks with the Palestinians. Israel's ties with Washington may also be harmed as Barack Obama, who supports a two-state solution and the ending of illegal settlements, is eager to pursue a peace deal immediately.

If Netanyahu is unable to secure a broad-based unity government the prospects of working towards a peace process with his US counterparts may become even more elusive.

While Israeli authorities suggested in a council meeting that they may consider relocating the families to a nearby area – agreements have yet to be made. Is this another Israeli attempt to Judize the occupied city?

What will be the future of Jerusalem? Does the two state solution still stand a chance? And is a peace process possible under a right-wing Israeli government? 

Inside Story presenter Veronica Pedroza is joined by Suhail Khalilieh, the head of settlements monitoring department at the Applied Research Institute; Hagit Ofran, the head of Peace Now's Settlement Watch, and Khalil Toufakji, director of the Maps Department of the Arab Studies Society.

This episode of Inside Story aired on Monday, February 23, 2009 at 1730GMT and 2230GMT, with repeats at 0430GMT and 0830GMT on Tuesday.