Palestinian officials on Sunday slammed Israel's demolition of an East Jerusalem hotel to make way for settler homes, accusing Israel of destroying any chance of peace.

Palestinians reacted furiously to the demolition of part of the Shepherd Hotel, which sits on a piece of land in occupied East Jerusalem where developers plan to build a complex of 20 luxury apartments for Jewish settlers.

"By doing this, Israel has destroyed all the US efforts and ended any possibility of a return to negotiations," Nabil Abu Rudeina, a spokesman for President Mahmoud Abbas, said in a statement.

"Israel has no right to build in any part of east Jerusalem, or any part of the Palestinian land occupied in 1967," Abu Rudeina said, calling on the United States to "stop Israeli tampering."

Chief Palestinian negotiator Saeb Erakat accused Israel of trying to supplant East Jerusalem's Palestinian residents.

"The state of Israel is demolishing one Palestinian property after another in an effort to cleanse Jerusalem of its Palestinian inhabitants, heritage and history," he said.

"Such actions are unlawful and undermine the two-state solution and the negotiations process."

US-brokered peace talks between Israel and the Palestinians have been on hold since late September, when an Israeli freeze on the construction of Jewish settlements expired.

Abbas has insisted he will not hold peace talks while Israel continues to build on land which the Palestinians want for their future state.

Israel said on Saturday that its chief peace negotiator, Yitzhak Molcho, would travel to Washington next week to seek to advance peace efforts and that a Palestinian delegate would do the same.

The Palestinians have said they will not hold any talks with Israel without a new settlement freeze.

On Sunday morning, three bulldozers worked to bring down part of the dilapidated hotel, which was once home to Jerusalem's Muslim leader, Mufti Haj Amin Al-Husseini, infamous for his ties to Nazi leader Adolf Hitler.

The Islamist movement Hamas, which rules Gaza, urged Abbas' rival administration "to no longer pursue the resistance in its defence of Jerusalem and Palestinian rights," in a statement issued in Damascus.

In Jeddah, the Organization of the Islamic Conference blasted the demolition as a "flagrant violation of international law."

Ghassan Khatib, head of the Palestinian Authority's Government Media Center, accused Israel of defying the international community, which has criticized Israel for building in the contested eastern sector of the city.

The demolition is "intended to establish settlement outposts and is a continuation of the policy of settlement and Judaisation of the city in violation of international law and human rights," Khatib said.

Final approval for construction of the East Jerusalem apartments came in March, as Prime Minister Benjamin Netanyahu held talks in Washington. The announcement drew international criticism, but Netanyahu defended the project.

Though East Jerusalem is largely Palestinian, an increasing number of hardline Israeli settlers have moved into the area's neighborhoods, sparking fights with Palestinian residents.

Palestinians said Israeli police on Sunday arrested several Palestinian residents in the East Jerusalem neighborhood of Silwan, another target of settlement and a frequent flashpoint between residents and settlers.

An estimated 2,000 Jewish settlers live in Palestinian neighborhoods of the Holy City, although the exact number of properties they own is unclear.

The Palestinians regard East Jerusalem as the capital of their promised state and fiercely oppose any attempts to extend Israeli control over it.

Israel captured East Jerusalem in the 1967 Six-Day War and later annexed it in a move the rest of the world has never recognized. Israel considers the whole of Jerusalem its "eternal and indivisible" capital.

Science and Technology Minister Daniel Hershkowitz of the religious-nationalist Habait Hayehudi (Jewish Home) party defended Jewish building in east Jerusalem and Sunday's demolition.

"Jerusalem is the capital of Israel, all parts of Jerusalem, and that place was purchased legally and building there residences for people can only improve the quality of life in Jerusalem," he told reporters.