Rebuffing U.S. criticism of a new housing project for Jews in an Arab neighborhood of East Jerusalem, Prime Minister Binyamin Netanyahu's office said Monday that the project was a private initiative in which the government "was not involved."

Bulldozers tore down a wing of the former Shepherd Hotel on Sunday to make way for the project. That drew a rebuke from Secretary of State Hillary Rodham Clinton, who said the action undermined peace efforts.

The property was taken over by Israel after it captured the area in 1967, and it was sold in 1985 to Irving Moskowitz, a Miami-based businessman who supports Jewish settlement in East Jerusalem. Palestinians seek East Jerusalem as their future capital.

"There should be no expectation that the State of Israel will impose a ban on Jews purchasing private property in Jerusalem," the statement from Netanyahu's office said.

Adnan Husseini, the Palestinian Authority's governor of Jerusalem, said the project was not a strictly private enterprise, but part of an Israeli plan to expand the Jewish presence and drive a wedge between Arab areas in East Jerusalem. "This is a strategy of a government," he said.