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"This disturbing development undermines peace efforts to achieve the two state-solution," she said in a statement.
Earlier, furious Palestinian officials accused Israel of destroying any chance of peace by demolishing part of the building, which sits on a plot of land in occupied east Jerusalem where developers plan to build a complex of 20 luxury apartments for Jewish settlers.
"By doing this, Israel has destroyed all the US efforts and ended any possibility of a return to negotiations," Nabil Abu Rudeina, a spokesman for Palestinian president Mahmud Abbas, said in a statement.
"Israel has no right to build in any part of east Jerusalem, or any part of the Palestinian land occupied in 1967," Abu Rudeina said, calling on the United States to "stop Israeli tampering."
In Abu Dhabi, Clinton spoke out in rare criticism of Washington's key Middle East ally.
"In particular, this move contradicts the logic of a reasonable and necessary agreement between the parties on the status of Jerusalem," she said.
"We believe that through good faith negotiations, the parties should mutually agree on an outcome that realizes the aspirations of both parties for Jerusalem, and safeguards its status for people around the world."
The Palestinians regard east Jerusalem as the capital of their promised state and fiercely oppose any attempts to extend Israeli control over it.
Israel captured east Jerusalem in the 1967 Six-Day War and later annexed it in a move the rest of the world has never recognised. It considers the whole of Jerusalem its "eternal and indivisible" capital.
Chief Palestinian negotiator Saeb Erakat on Sunday accused Israel of trying to supplant east Jerusalem's Palestinian residents.
"The state of Israel is demolishing one Palestinian property after another in an effort to cleanse Jerusalem of its Palestinian inhabitants, heritage and history," he said.
US-brokered peace talks between Israel and the Palestinians have been on hold since late September, when an Israeli freeze on the construction of Jewish settlements expired.
Abbas has insisted he will not hold peace talks while Israel continues to build on land which the Palestinians want for their future state.
Israel said on Saturday its chief peace negotiator, Yitzhak Molcho, would travel to Washington next week to seek to advance peace efforts and that a Palestinian delegate would do the same.
The Palestinians have said they will not hold any talks with Israel without a new settlement freeze.
"We will continue to press ahead with the parties to resolve the core issues, including Jerusalem, in the context of a peace agreement," Clinton said in Abu Dhabi.
On Sunday morning, three bulldozers worked to bring down part of the dilapidated hotel which was once home to Jerusalem's Muslim leader, Mufti Haj Amin al-Husseini, infamous for his ties to Nazi leader Adolf Hitler.
The European Union also joined in the condemnation.
"I reiterate that settlements are illegal under international law, undermine trust between the parties and constitute an obstacle to peace," EU foreign policy chief Catherine Ashton said in a statement.
In Jeddah, the Organisation of the Islamic Conference called the demolition a "flagrant violation of international law."
Final approval for construction of the east Jerusalem apartments came in March, as Prime Minister Benjamin Netanyahu held talks in Washington. The announcement drew international criticism, but Netanyahu defended the project.
Though east Jerusalem is largely Palestinian, an increasing number of hardline Israeli settlers have moved into the area's neighbourhoods, sparking fights with Arab residents.
Israel's science minister, Daniel Hershkowitz of the religious-nationalist Habait Hayehudi (Jewish Home) party, defended Jewish building in east Jerusalem and Sunday's demolition.
"Jerusalem is the capital of Israel, all parts of Jerusalem, and that place was purchased legally and building there residences for people can only improve the quality of life in Jerusalem," he told reporters.
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Earlier, furious Palestinian officials accused Israel of destroying any chance of peace by demolishing part of the building, which sits on a plot of land in occupied east Jerusalem where developers plan to build a complex of 20 luxury apartments for Jewish settlers.
"By doing this, Israel has destroyed all the US efforts and ended any possibility of a return to negotiations," Nabil Abu Rudeina, a spokesman for Palestinian president Mahmud Abbas, said in a statement.
"Israel has no right to build in any part of east Jerusalem, or any part of the Palestinian land occupied in 1967," Abu Rudeina said, calling on the United States to "stop Israeli tampering."
In Abu Dhabi, Clinton spoke out in rare criticism of Washington's key Middle East ally.
"In particular, this move contradicts the logic of a reasonable and necessary agreement between the parties on the status of Jerusalem," she said.
"We believe that through good faith negotiations, the parties should mutually agree on an outcome that realizes the aspirations of both parties for Jerusalem, and safeguards its status for people around the world."
The Palestinians regard east Jerusalem as the capital of their promised state and fiercely oppose any attempts to extend Israeli control over it.
Israel captured east Jerusalem in the 1967 Six-Day War and later annexed it in a move the rest of the world has never recognised. It considers the whole of Jerusalem its "eternal and indivisible" capital.
Chief Palestinian negotiator Saeb Erakat on Sunday accused Israel of trying to supplant east Jerusalem's Palestinian residents.
"The state of Israel is demolishing one Palestinian property after another in an effort to cleanse Jerusalem of its Palestinian inhabitants, heritage and history," he said.
US-brokered peace talks between Israel and the Palestinians have been on hold since late September, when an Israeli freeze on the construction of Jewish settlements expired.
Abbas has insisted he will not hold peace talks while Israel continues to build on land which the Palestinians want for their future state.
Israel said on Saturday its chief peace negotiator, Yitzhak Molcho, would travel to Washington next week to seek to advance peace efforts and that a Palestinian delegate would do the same.
The Palestinians have said they will not hold any talks with Israel without a new settlement freeze.
"We will continue to press ahead with the parties to resolve the core issues, including Jerusalem, in the context of a peace agreement," Clinton said in Abu Dhabi.
On Sunday morning, three bulldozers worked to bring down part of the dilapidated hotel which was once home to Jerusalem's Muslim leader, Mufti Haj Amin al-Husseini, infamous for his ties to Nazi leader Adolf Hitler.
The European Union also joined in the condemnation.
"I reiterate that settlements are illegal under international law, undermine trust between the parties and constitute an obstacle to peace," EU foreign policy chief Catherine Ashton said in a statement.
In Jeddah, the Organisation of the Islamic Conference called the demolition a "flagrant violation of international law."
Final approval for construction of the east Jerusalem apartments came in March, as Prime Minister Benjamin Netanyahu held talks in Washington. The announcement drew international criticism, but Netanyahu defended the project.
Though east Jerusalem is largely Palestinian, an increasing number of hardline Israeli settlers have moved into the area's neighbourhoods, sparking fights with Arab residents.
Israel's science minister, Daniel Hershkowitz of the religious-nationalist Habait Hayehudi (Jewish Home) party, defended Jewish building in east Jerusalem and Sunday's demolition.
"Jerusalem is the capital of Israel, all parts of Jerusalem, and that place was purchased legally and building there residences for people can only improve the quality of life in Jerusalem," he told reporters.
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