Israel demolished two Palestinian houses in East Jerusalem on Monday, a day before U.S. Secretary of State Hillary Clinton was to launch an initial effort to shore up the foundations of a shaky peace process.

Two bulldozers flattened a home owned by Mahmoud al-Abbasi in the Arab neighbourhood of Silwan on land Israel captured in the 1967 Middle East war.

Israeli authorities said the house was built without a municipal permit.

Palestinians say building permission is nearly impossible to obtain from Israel's Jerusalem city hall and say this is part of a policy to drive out Arab residents.

The Jerusalem municipality said last week it planned to demolish 88 homes, though not immediately, that were built without permits in another section of Silwan, near the walls of Jerusalem's Old City, to create a public garden.

"The entire neighbourhood is threatened with this. We asked for a permit but we were turned down. Eight of us lived in this house," Abbasi said after his home was torn down.

Hatem Abdel Qader, a Palestinian Authority adviser on Jerusalem affairs, said the Israeli move was "a message to Palestinians that house demolitions will continue".

An Israeli police spokesman said an "illegally built" Palestinian house was also destroyed in Jabal Mukaber, another East Jerusalem neighbourhood.

Israel considers all of Jerusalem its "eternal and united capital" but has not won international recognition of its claim.

The Palestinian Authority says it wants East Jerusalem as the capital of the state it hopes to establish in the West Bank and Gaza Strip.

Clinton, who attended a Gaza reconstruction conference in Egypt on Monday, was to arrive in Israel later in the day.

She was due to meet Israeli leaders on Tuesday and Palestinian leaders on Wednesday, taking her first steps in the region to get peace negotiations moving after the 22-day Gaza offensive Israel launched in December.

The future of Jerusalem is a major bone of contention in peace talks re-started by the Bush administration in late 2007. Some 500,000 Jews and 260,000 Palestinians live in the city.

Israeli Prime Minister-designate Benjamin Netanyahu, who is trying to form a government led by his right-wing Likud party after a Feb. 10 election, wants to shift the focus of talks from territorial matters to strengthening the Palestinian economy.

Palestinian leaders have rejected the concept of an "economic peace".