Divided cities within contested states are a category in their own right, in that their division is driven by issues of national sovereignty as well as ethnic, religious and linguistic cleavages. Reconstituting them as integrated urban spaces, therefore, requires policy shifts on many levels—local, municipal and state—but too often these are hampered by fears of loss of sovereignty and external domination. The case of Jerusalem in the Palestinian-Israeli conflict is a prime example of how national sovereignty issues can be seen as having an impact upon urban divisions. One option that is proposed for the resolution of this conflict, which has generated intense debate on both sides, is that of a binational Israeli-Palestinian state. This article argues that there is a false dichotomy concerning the competing benefits of binational and two-state models in the Palestinian-Israeli conflict. It contends, on the one hand, that the binational model comprises many forms, some of which are more confederal in structure. On the other hand, for the two state model to function effectively a high degree of interstate coordination is required which brings it close to some forms of confederalism. The article examines the discussions on divided Jerusalem to explore this argument and highlights the degree of interstate coordination that is required if any of the plans being put forward for the future of the city are to work. It concludes by relating the Jerusalem example to the wider issue of divided cities in contested states.