Embassy officials had intended to move to Kirya Tower in Tel Aviv, partly owned by real-estate company Africa-Israel Investments Ltd but has reversed its decision while it seeks clarifications from the company.

A subsidiary of Africa-Israel, Danya Cebus, has built homes in at least one West Bank settlement, Maale Adumim, but it is not clear what the scope of the company's activities are.

Africa-Israel, which is owned by Israeli billionaire Lev Leviev, said in response that the British embassy's perception of Danya-Cebus' operations in the West Bank is "fundamentally wrong," but refused to provide any additional details.

It said pro-Palestinian organisations in Britain have long been trying to promote a "biased, one-sided political agenda" against Israeli business corporations, business people, academics and researchers.

"No leases were signed, and part of the reason was we looked into the issue of Africa-Israel and settlements and settlement holdings and we asked for clarification on those issues," a spokesman for the British Embassy said.

The embassy's decision reflected growing UK and US pressure on Israel to abide by its international pledges to freeze settlement building in the West Bank and dismantle unauthorised outposts.

Mrs Clinton, the US Secretary of State, criticised Israeli demolitions of Palestinian homes in East Jerusalem yesterday, saying it was of "deep concern".

"Clearly this kind of activity is unhelpful and not in keeping with the obligations entered into under the 'road map'," she said, referring to peace efforts between the sides.

Mrs Clinton, on her first foray into Middle Eastern diplomacy since taking her new post, spoke in the West Bank town of Ramallah following a meeting with Palestinian President Mahmoud Abbas.

She added that she would be raising the issue of the planned demolitions of some 80 homes Palestinian neighbourhood in traditionally Arab East Jerusalem with the Israeli government.

Before the houses were even built about fifteen years ago Israel had plans to turn the land, just beyond the walls of Jerusalem's Old City, into an archeological garden for tourists. Recently the Jerusalem Municipality decided to follow through on those plans.

Jerusalem municipal officials say the homes were built illegally without permits but Palestinians counter that in general it is extremely difficult to receive permits to build in the city and so families have no choice but to build without them.

The future of Jerusalem is one of the key disputes between the sides. The Palestinians seek East Jerusalem as their future capital but Israeli leaders have said the city must remain united as its capital.

Mrs Clinton reiterated the message she sounded in talks with Israeli leaders on Tuesday that a Palestinian state should be established as a way to resolve the Israeli-Palestinian conflict.

"The US is committed to a two-state solution," she said during a stop at a Ramallah school. "We will work immediately to help solve these problems and I'm very committed to that."

The Palestinian leadership also wants the US to put pressure on Israel to open border crossings into the Gaza Strip which have been only sporadically opened since Hamas militants seized control of the territory over a year ago.

It is also seeking commitments, Palestinian officials said, that Israel halt all construction of Jewish settlements in the West Bank.