Jewish settlers today moved into a house in East Jerusalem after Israeli police evicted a Palestinian family of 14 and removed all their possessions.

The move will dismay US officials who are striving to discourage settler activity in East Jerusalem in an attempt to restart the stalled peace talks between Israel and the Palestinians.

Armed police arrived early this morning in the area of Jabel Mukaber, a new target for ideologically driven settler activists, following a court ruling that ownership of the house was now in Jewish hands. Three removal trucks took away the family's belongings as they watched from a neighbour's house.

Scores of heavily armed police surrounded the area, initially refusing to let non-residents through makeshift checkpoints.

At the property, several muscular Israeli men refused to identify themselves or explain what they were doing. One, who had carried two flak jackets inside, said: "This is a private home. Nothing is happening here. Have a good day." The sound of drilling and hammering could be heard while on ground outside the house men equipped with bolt-cutters measured up heavy-duty steel window-shields.

Fadi Kareem, 21, a member of the evicted family, said: "They came when I was asleep. Police came with loaded weapons aiming them at us, and told us to get out. We knew it was coming but had no warning of today. We knew settlers wanted to take over the place."

Asked how he felt, he said: "I can't even speak."

A neighbour, Raid Kareem, 36, said the newcomers were the first Jewish settlers in the area. "It's not good, it's a problem," he said. "Now they will bring in security. My children won't be able to play on the street. My son is already scared of the police."

Anti-settlement activists at the scene claimed that Elad, an organisation that finances Jewish settlement in Arab neighbourhoods of Jerusalem, was behind the purchase of the house.

The Kareem family claim the house was inherited by five siblings following the death of the owner, one of whom sold his stake to Wohl Investments, a company said to be a front for Elad. Other signatures to the sale were forged, they say. An Israeli court ruled the sale was legal.

Police spokesman Micky Roseneld said that the contents of the house had been removed on a court order "based on the fact that the house was sold by an Israeli-Arab family to a Jewish family". The family had not been in the house at the time, he added. Their possessions were removed in three vans in an operation which took three and a half hours. "The police presence was to prevent any disorder."

Assaf Sharon, an Israeli activist from the Sheikh Jarrah Solidarity Movement, said: "[The settlers] are now closing off the entrances, turning it into a fortress, bringing in guards. It's the usual drill – this is how they start a new settlement."

In a statement, he said: "The new settlement is without doubt meant to worsen the tensions between Washington and Jerusalem and set fire to the powder keg that is East Jerusalem. The residents of Jerusalem will pay the price for this despicable co-operation between the fundamentalist wing of the settlers' movement and the Jerusalem police."

There are already a number of highly volatile settlements in the heart of Arab neighbourhoods in East Jerusalem, such as in Sheikh Jarrah and Silwan. These are orchestrated by politically motivated activists, and are distinct from big Jewish settlements in the east of the city, although all are illegal under international law. East Jerusalem was captured by Israel in the 1967 Six-Day war and later annexed in a move not recognised internationally.

The US has made clear its disapproval of any expansion of Jewish presence in East Jerusalem. The issue has become a stumbling block for the resumption of talks. The Israeli prime minister, Binyamin Netanyahu, wants Barack Obama to exempt in writing East Jerusalem from a second temporary freeze on settlement construction. The US is so far refusing to do so.