MYTH #263This article can be found--with hyperlinks--at http://www.jewishvirtuallibrary.org/jsource/myths2/Jerusalem.html#q14
"East Jerusalem should be part of a Palestinian state because all its residents are Palestinian Arabs and no Jews have ever lived there."
Before 1865, the entire population of Jerusalem lived behind the Old City walls (what today would be considered part of the eastern part of the city). Later, the city began to expand beyond the walls because of population growth, and both Jews and Arabs began to build in new areas of the city.
By the time of partition, a thriving Jewish community was living in the eastern part of Jerusalem, an area that included the Jewish Quarter of the Old City. This area of the city also contains many sites of importance to the Jewish religion, including the City of David, the Temple Mount and the Western Wall. In addition, major institutions such as Hebrew University and the original Hadassah Hospital are on Mount Scopus — in eastern Jerusalem.
The only time that the eastern part of Jerusalem was exclusively Arab was between 1949 and 1967, and that was because Jordan occupied the area and forcibly expelled all the Jews.
Source: Myths & Facts Online -- A Guide to the Arab-Israeli Conflict by Mitchell G. Bard.