US Secretary of State Hillary Clinton said on Sunday Israel's move to proceed with an east Jerusalem settlement project by razing a derelict hotel undermined the peace effort.

"This disturbing development undermines peace efforts to achieve the two-state solution," Clinton said in a statement in Abu Dhabi, where she is on an official visit.

"In particular, this move contradicts the logic of a reasonable and necessary agreement between the parties on the status of Jerusalem."

In Abu Dhabi, Clinton also dismissed Israeli assessments of delays in the Iranian nuclear program.

Clinton said a recent assessment by outgoing Mossad director Meir Dagan that Iran would not be able to build an atomic bomb until at least 2015 should not undercut international determination to keep the pressure on Iran through sanctions and other means to come clean about its atomic work.

"The timeline is not so important as the international effort to try to ensure that whatever the timeline, Iran is not pursuing nuclear weapons," Clinton told reporters on her plane as it arrived in Abu Dhabi.

"I think we should keep the attention where it belongs," Clinton said, adding that she was confident existing sanctions on Iran "have had a very significant impact."

European response

Earlier on Sunday, European Union foreign affairs chief Catherine Ashton also harshly condemned the demolition of the Shepherd Hotel for the purpose of building housing units for Jewish residents. Ashton described the compound as a Palestinian symbol.

Ashton said in a statement that she strongly condemns the demolition of the Shepherd Hotel and the future construction of "an illegal settlement." She noted settlements were illegal according to International Law.

Ashton said that settlements undermine trust between the parties and pose an obstacle for peace. She noted that east Jerusalem was part of occupied territory adding that the EU does not recognize the annexation.

The UK also condemned the step. "The British Government reaffirms its strong, long-standing opposition to the creation of this new illegal settlement in occupied East Jerusalem and condemns today’s demolition in Sheikh Jerrah," a statement on behalf of the British Foreign Office noted.

"This latest settlement activity does not help – on the contrary, it raises tensions unnecessarily," Britain's Foreign Office Minister Alistair Burt said.

The new Jewish neighborhood will contain 20 housing units.

The EU's foreign policy chief also expressed sorrow over the death of four Palestinians over the last few days in the West Bank and urged the parties to cease violent acts.

Reuters, AFP and Ronen Medzini contributed to this report