The diplomatic compound that will serve as the American Embassy until a permanent site is found lies partly in a contested zone known as No Man’s Land.Exactly what is the legal basis for considering land that is unquestionably disputed to be "occupied"?
No Man’s Land encompasses the area between the armistice lines drawn at the end of the 1948-49 war and was claimed by Jordan and Israel. Israel won full control of it in the 1967 war, so the United Nations and much of the world consider it occupied territory.
The answer is, the rules don't apply to Israel. Just call is "occupied" and the label will stick.
I found evidence that Israel and Jordan had allowed each side to move into the zone from a National Geographic article in 1959:
The State Department has avoided taking a clear position on the matter but relies on the fact that Israel and Jordan had informally divided the contested enclave.
The provisional embassy site, in the Arnona neighborhood, “has been in continuous Israeli use since 1949,” the department said in a statement last week. “It is today a mixed residential-commercial neighborhood.”
(h/t Ronald)