US Secretary of State Hillary Clinton called the Sunday demolition of a Palestinian hotel in Jerusalem a "disturbing development undermines peace efforts to achieve the two state-solution."

In a statement issued the evening following the demolition, Clinton said the demolition of The Shepherd Hotel by Israeli settlement builder Irving Moskowitz "contradicts the logic of a reasonable and necessary agreement between the parties on the status of Jerusalem."

The hotel, once the headquarters of former grand mufti of Jerusalem Sheikh Amin Al-Husseini, was demolished to make room for 20 new settler homes.

Moskowitz's ownership of the hotel is contested, and its demolition was seen as an act of aggression against Palestinians in the neighborhood.

Sheikh Jarrah, where the hotel stood, is a Palestinian area where several homes have been taken over by Israeli settlement groups.

Clinton said that despite the demolition, the US would "continue to press ahead with the parties to resolve the core issues, including Jerusalem, in the context of a peace agreement," but noted that a continued lack of resolution "harms Israel, harms the Palestinians, and harms the U.S. and the international community."