Bulldozers began tearing down a former hotel building Sunday to make way for a Jewish housing development in an Arab neighborhood of East Jerusalem, pushing ahead with a contentious project that has raised concerns in Washington.

The work drew a rebuke from Secretary of State Hillary Rodham Clinton and sharp condemnation from Palestinian officials, further souring the diplomatic atmosphere as the Obama administration works to sustain peace efforts despite a breakdown of direct talks in a dispute over Israeli building in the West Bank and East Jerusalem.

Israeli and Palestinian envoys are scheduled to travel to Washington this week for separate discussions with American officials on ways to move forward. Israeli Prime Minister Binyamin Netanyahu has urged the Palestinians to resume negotiations, but they have said talks are impossible while Israel is building settlements on land they want for a future state.

"We are very concerned about the initiation of demolition of the Shepherd's Hotel in East Jerusalem," Clinton said in Abu Dhabi. "This disturbing development undermines peace efforts to achieve the two state-solution. In particular, this move contradicts the logic of a reasonable and necessary agreement between the parties on the status of Jerusalem."

The bulldozers tore down a wing of the former Shepherd Hotel in the Palestinian neighborhood of Sheikh Jarrah, an area where Jewish nationalists already live in several homes and are seeking to expand their presence. The new project is to include 20 housing units on the property, bought in 1985 by the Miami-based businessman Irving Moskowitz, a long-time supporter of Jewish building and settlement in East Jerusalem.

The hotel building, last used as a base of the Israeli border police, was originally built in the 1930's as a villa for Haj Amin al-Husseini, the grand mufti of Jerusalem, who vehemently opposed both the Zionist and British presence in Palestine and aligned himself with Hitler. While most of the structure will be torn down, part of the landmark building will be preserved.

The U.S. voiced its concern over the new housing project in 2009 after the plan received approval from the Jerusalem municipality. Netanyahu responded publicly, asserting that Jews had the right to live anywhere in Jerusalem.

After the work began Sunday, Saeb Erekat, the chief Palestinian negotiator, called it part of an Israeli plan to "preempt any solution on Jerusalem."

"While Netanyahu continues his public relations campaign regarding the peace process, on the ground he is rapidly moving to prevent the establishment of a sovereign Palestinian state," Erekat said in a statement.

The Palestinians seek East Jerusalem, annexed by Israel after it was captured from Jordan in the 1967 Middle East war, as their future capital.

Mark Regev, a spokesman for Netanyahu, said the development was a private initiative in which the government had no role. "Is it logical to expect the Jewish state to prevent Jews from buying property legally in Jerusalem?," he asked.

Daniel Seidemann, an Israeli lawyer and expert on Israeli plans in East Jerusalem, said that the Shepherd Hotel project was a key part of an effort to build a chain of Jewish enclaves around Jerusalem's Old City. He said there already were more than 2,500 Israelis living inside Palestinian neighborhoods, "creating a very dangerous and volatile mix. . .in one of the most sensitive places on the planet."