JERUSALEM, Jan 9 (Jeffrey Heller/Reuters) - Israeli bulldozers cleared the way on Sunday for 20 new homes for Jews in East Jerusalem, demolishing a derelict hotel in a settlement project that has angered Palestinians and drawn US objections.

Construction at the Shepherd Hotel compound, whose ownership is contested, was likely to deepen Israeli-Palestinian acrimony as Washington tries to revive peace talks stalled by a dispute over Israel's settlement policy in the West Bank and East Jerusalem, areas captured in a 1967 war.

We see this matter as extremely dangerous, said Hatem Abdel Qader, the Palestinian official who oversees Jerusalem affairs for President Mahmoud Abbas's Fatah movement.

With direct Israeli-Palestinian negotiations at a standstill, Israel said an emissary of Prime Minister Benjamin Netanyahu and a Palestinian envoy would travel to Washington in the next few days to seek ways to restart talks.

But Palestinian negotiator Saeb Erekat said the meetings, if they happen, will happen on a separate basis with the American administration: Palestinian-American, Israeli-American.

In the predominantly Arab neighbourhood of Sheikh Jarrah, bulldozers tore into the decaying hotel built in the 1930s for Muslim grand mufti Haj Amin Husseini, who fought the British and Zionists and became a World War Two ally of Hitler.

Israel, Abdel Qader said, was trying to create a belt of settlements around East Jerusalem, which Palestinians seek as the capital of the state they intend to create in the West Bank, where Abbas holds sway, and the Hamas Islamist-run Gaza Strip.


ABSENTEE PROPERTY

No violence was reported after the demolition in Sheikh Jarrah, where evictions of Palestinian families from homes that Israeli courts have ruled were owned in the past by Jews or purchased from Arabs has led to anti-settler protests.

The hotel was declared absentee property by Israel after it captured and annexed East Jerusalem. The title was transferred to an Israeli firm, which sold it in 1985 to Irving Moskowitz, a Florida bingo king and patron of Jewish settlers.

Adnan Husseini, the Palestinian Authority-appointed mayor of Jerusalem, said knocking down the historic building was an act of barbarism.

His family claim ownership of the property and had been using the Israeli courts to challenge the steps that had led to its sale.

The United States voiced its displeasure over the project to Israel's Washington ambassador in 2009 after the plan received the green light from Israel's Jerusalem municipality.

Netanyahu responded publicly at the time to the U.S. criticism by saying Jews have right to live anywhere in Jerusalem, a city that Israel calls its united capital, a designation that is not recognised internationally.

Some 190,000 Israelis live in East Jerusalem and adjacent areas of the West Bank that Israel annexed to its Jerusalem municipality after the 1967 conflict. East Jerusalem has 250,000 Palestinian residents. (Additional reporting by Ali Sawafta and Tom Perry in Ramallah; Editing by Jon Hemming)