"I strongly condemn this morning's demolition of the Shepherd Hotel and the planned construction of a new illegal settlement," the EU's foreign policy chief Catherine Ashton said in a statement.

"I reiterate that settlements are illegal under international law, undermine trust between the parties and constitute an obstacle to peace,"

Ashton reiterated that "the EU does not recognize" the annexation of East Jerusalem by Israel.

British Foreign Office Minister Alistair Burt also responded to reports that work has begun to enable creation of a new illegal settlement in occupied East Jerusalem, and said that “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. The establishment and expansion of settlements in the occupied Palestinian territories are illegal."

"We oppose provocative unilateral actions such as this, which hinder efforts to resume talks between the two parties leading to a two-state solution to this conflict, with Jerusalem as the shared capital of the two states living side by side in peace and security. That is the way forward. This latest settlement activity does not help – on the contrary, it raises tensions unnecessarily," he added.