Hillary Clinton pledged her full support yesterday to the ailing Palestinian Administration of President Abbas, whose efforts to negotiate a peace deal with Israel have brought little progress, and whose standing among his own people has slipped dramatically.

Speaking in Ramallah, the de facto capital of the Palestinian Authority, the US Secretary of State said that Mr Abbas's Administration was the only legitimate government of the Palestinian people - yet another snub to Hamas, the Islamist movement that rules the Gaza Strip and which the US regards as a terrorist organisation.

Washington is trying to bolster Mr Abbas, whose Fatah forces were humiliatingly driven from Gaza by Hamas fighters more than 18 months ago despite being funded and armed by the West. His failure since then to secure any discernible progress in peace talks with Israel's outgoing centrist Government has further eroded his credibility.

Mrs Clinton also publicly ticked off Israel for its plans to demolish more than 80 Palestinian homes in predominantly Arab East Jerusalem that were built without official permits.

The Palestinian community has said that Israeli authorities refuse them permission to build, and contrast the state's assiduousness in razing illegal Palestinian homes with its hands-off attitude to Jewish settlement building in the West Bank. Some Israeli anti-settlement groups have said that the scheduled demolition of the homes, in an area called Silwan, just outside the Old City of Jerusalem, is an attempt to encircle the historic city centre with Jewish neighbourhoods and undermine Palestinian claims to the area.

Mrs Clinton showed her willingness to wade into delicate matters by labelling the planned demolitions “unhelpful.” Diplomatic sources said Mrs Clinton was determined to reinvigorate the peace process, which languished for years under the Bush Administration.

Britain also showed its resolve to oppose Jewish settlement expansion by saying that it had abandoned plans to move its Tel Aviv embassy into new premises owned by a London-based Israeli billionaire who invests in the controversial West Bank communities. The embassy had frozen plans to move into a new tower block part-owned by Lev Leviev, Israel's wealthiest man, who made his fortune in diamonds.

Tom Phillips, the British Ambassador, had asked Mr Leviev - a religious father of nine - to clarify his relationship with the settlements after Palestinian rights groups accused him of funding them. After consideration, the embassy said it would not make the move. “The UK Government has always regarded settlements as illegal but what has happened in recent months is that we are looking for ways to make a difference on this issue,” said Karen Kaufman, an embassy spokeswoman. “We see them as an obstacle to peace.”

The rental of the embassy space in the Kirya Tower would have brought £115,000 a year for the Africa Israel multinational company that was started a decade ago by Mr Leviev, who moved to Israel from Uzbekistan in 1971 as an impoverished immigrant.

His company criticised the British decision. “It is lamentable that this pressure ends up being vented against Israeli business entities that have no impact whatsoever on the setting of Israel's policy,” it said in a statement.

Last year Mr Leviev paid £35 million for a seven-bedroom home in Hampstead, one of the most expensive house purchases in British history.

Britain had been weighing up whether to abandon the move into his tower block for several months, angering some on the far Right of Israeli politics.