Bulldozers demolished a hotel in an Arab east Jerusalem neighborhood Sunday to make way for a new Israeli enclave, moving ahead with a plan that has angered the Palestinians and the U.S.

The Shepherd Hotel is to be replaced by 20 apartments for Israelis. Workmen and earth-moving equipment were knocking down the structure at the site in the neighborhood of Sheikh Jarrah on Sunday.

Peace talks are currently stuck over Israeli construction of this kind. The Palestinians say they will not renew talks without an Israeli settlement freeze that includes east Jerusalem, which the Palestinians claim as their future capital.

Israel says it has the right to build anywhere in the city, including east Jerusalem, which it annexed in 1967 in a move that has not been internationally recognized.

Chief Palestinian negotiator Saeb Erekat condemned the demolition of the hotel. "As long as this government continues with settlement and acts like the demolition of the Shepherd Hotel there will no negotiations," he said.

The Shepherd Hotel project is funded by Jewish American millionaire Irving Moskowitz, a longtime patron of Jewish settlers.

Settler groups have been moving Israeli families into Palestinian neighborhoods in east Jerusalem, attempting to ensure the city will not be divided in a future peace deal.

Unrest in those neighborhoods recently has been on the rise.