Jerusalem mayor Nir Barkat has voiced support for a scheme that could see responsibility for areas in the city's eastern Arab sector transferred to the Israeli military body which runs the West Bank.
The scheme, one of a number of options being considered, would affect areas of the city that are beyond Israel's controversial security barrier, but which technically remain within the municipal boundaries of the Holy City.
"The mayor is examining different alternatives for dealing with the difficulties emanating from the lack of compatibility between the security barrier and the municipal borders of Jerusalem in regard to services provided to residents," said a municipality statement sent to AFP earlier this week.
The barrier does not follow the municipal boundaries of the city and the city council says it creates a logistical problem in service provision.
But the Palestinians and an Israeli rights group have hit out at the scheme as a ploy to ensure the city's demographic balance stays firmly in Israel's favour by pushing out east Jerusalem residents.
Israel refers to all of Jerusalem as its "eternal and undivided capital," even the Arab eastern sector which it occupied during the 1967 Six Day War and later annexed, and any talk of re-dividing the city is completely taboo.
But the city says the scheme "does not include changing the borders or the municipal territory of Jerusalem" and that the rationale behind the plan is a technical swap of responsibility between the city and the Israeli Civil Administration in order to provide services to residents on both sides of the barrier."
The Civil Administration is the Israeli military body which carries out all practical bureaucratic functions relating to the Palestinians in the occupied West Bank.
Barkat has consistently vowed he would never divide the city, so his support for such a scheme would indicate a softening of his position in light of the de facto limits defined by the barrier.
Barkat first raised the issue of outsourcing the areas beyond the barrier in a speech last month. "We must relinquish areas of the municipality that are located outside of the fence," the English-language Jerusalem Post quoted him as saying.
Since the barrier went up, the Arab neighbourhoods which found themselves on the eastern side have been increasingly cut off from basic services such as rubbish collection, health services, policing and even veterinary services.
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"The lack of municipal services there is very grave," said Aryeh Dayan, a research for the NGO Ir Amim, which works for an "equitable" sharing of Jerusalem between Israelis and Palestinians.
"Our impression is that the municipality has lost completely its interest in these areas: almost no collection of rubbish, no repair of roads, no street lighting, very poor educational services and almost no health services," he said.
The city says the problem stems from "a security problem in providing services to residents" and that its officials cannot go there without police or army protection.
The biggest neighbourhoods which are affected are Kufr Aqeb, Samiramis and Shuafat refugee camp as well as several other districts which are home to at least 70,000 Jerusalem residents, Ir Amim says.
Transferring responsibility to the Civil Administration was unlikely to mean that residents would automatically lose their blue Jerusalem ID cards, Dayan said, but he warned that such a scheme would be a "huge step" in that direction.
"Knowing that Israeli policy is aimed at 'maintaining the demographic balance' in the city, we are afraid the decision could be a huge step towards a further decision to abolish the residency rights of tens of thousands of Palestinian Jerusalemites," he said.
Khalil Tufakji, a prominent Palestinian cartographer and expert on Israel's settlement policies, said the plan "falls within an Israeli policy to get rid of east Jerusalem citizens."
"The wall in east Jerusalem is not for security reasons but for demographic reasons," he said, pointing to an Israeli law which states that anyone who wishes to keep their residency must prove their "centre of life" is in Jerusalem.
"Those people have two choices: either to get back into Jerusalem -- and this is a problem because there is no room -- or stay in the West Bank and lose their ID. This is the Israeli goal."
A municipal spokesman refused to be drawn on whether the scheme would involve the residents losing their blue Jerusalem residency ID.
There are some 270,000 Palestinians living in east Jerusalem, who make up around 35 percent of the entire population of the city which stands at more than 780,000.