The U.N. chief "deplores" Israel's demolition of the Shepherd Hotel in East Jerusalem and said it only served to heighten tensions between Israel and the Palestinians, a U.N. spokesman said on Monday.

The Shepherd Hotel, torn down as part of a settlement project first announced in 2009, was declared "absentee property" by Israel after it captured and annexed East Jerusalem. Israel views all of Jerusalem as its capital, a claim that is not recognized internationally.

"The Secretary-General deplores yesterday's destruction of the Shepherd's Hotel in occupied East Jerusalem to make way for new settlement units in the heart of a Palestinian neighborhood, which only serves to heighten tensions," U.N. spokesman Martin Nesirky told reporters.

"It is deeply regrettable that growing international concern at unilateral expansion of illegal Israeli settlements is not being heeded," he said. "Such actions seriously prejudice the possibility of a negotiated solution to the Israeli-Palestinian conflict."

He added that U.N. chief Ban Ki-moon reiterated his previous calls on the government of Israel to freeze all settlement activity on Palestinian territory.

Ban's comments echoed remarks of U.S. Secretary of State Hillary Clinton, who on Sunday called the Israeli action a "disturbing development" that "undermines peace efforts to achieve the two-state solution."

Israeli Prime Minister Benjamin Netanyahu defended the settlement project on Monday, saying Jews have a right to live anywhere in Jerusalem.