Brushing aside international criticism, Israel demolished a Palestinian house in East Jerusalem in the latest in a series of actions that critics say is racheting up tensions in the city, harming chances for a two-state solution to the Israeli-Palestinian conflict.

Ammar Hudidon, a resident of the Jebel Mukaber neighbourhood and a father of seven children, said a bulldozer flattened his home yesterday after the Jerusalem municipality said he lacked building permits. Palestinians complain that the permits are virtually impossible to obtain.

A municipality spokesman stressed that the demolition was "conducted completely under the auspices of the Interior Ministry and the government of Israel" and was not ordered by the Mayor, Nir Barkat.

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It comes a day after President Barack Obama called on Israelis and Palestinians to take measures to promote peacemaking and two days after a Jerusalem planning committee approved a building project for the headquarters of an Israeli settlement group in Sheikh Jarrah, a Palestinian area which Jewish settlers are increasingly penetrating.

Israel views East Jerusalem, annexed in 1967, as part of its capital but the annexation is considered illegal by most of the international community.

Moshe Yogev, the treasurer of the Amana Settler Movement, said the building site is close to existing Israeli national police headquarters and government offices in Sheikh Jarrah. "It is not as if we are going there to establish a fact on the ground," he said.

Mr Yogev said the plan took 14 years to work its way through government and city committees. He was not sure if the settler group would follow through with moving its headquarters there. "We haven't decided yet," he said.

Other Israeli changes in Sheikh Jarrah include plans to evict two large families from homes they have occupied for more than 50 years on the grounds that they are not legal owners. It is believed their dwellings will be given over to settlers. Plans to demolish 88 Palestinian homes in the Silwan neighbourhood are temporarily on hold as a result of international pressure.

A British diplomat criticised the Israeli steps last night. "They [the new Israeli government] asked us for a pause while they formulate policy but if there will be a pause in the peace process there also needs to be a pause in the actions we are seeing in East Jerusalem. Such steps contradict Israel's stated goal of peace," the diplomat said.