Israel captured Silwan and neighbouring districts in the 1967 conflict, annexed and settled them, angering foreign powers that back the Palestinians’ goal of building a capital there for a future state taking in the occupied West Bank and Gaza Strip.

“Some people, not necessarily friends of ours, are obsessing about my being here,” Friedman said at the ceremony, adding the excavation project uncovered “the truth, whether you believe or not … the truth is the only foundation upon which peace will come to this area.” After his speech, Friedman, along with Greenblatt, Prime Minister Benjamin Netanyahu’s wife Sara and donors to the project, wielded hammers to break through a wall and open the subterranean path to the holy site revered by Jews as the Temple Mount and by Muslims as the Noble Sanctuary.

In a statement, the Palestinian Foreign Ministry said it “views the American attendance at and celebration of the Judaisation activities in occupied East Jerusalem as hostile acts against the Palestinians”.

“The administration of President Donald Trump proves day by day its … unlimited affiliation to the colonial settlement project led by the extremist right in the state of the occupation (Israel),” it said.

Breaking with long-standing US policy and international consensus, US President Donald Trump recognised Jerusalem as Israel’s capital in December 2017.

He left open the possibility of a future Palestinian foothold there under a negotiated peace deal.

Israeli-Palestinian peace talks have been stalled since 2014 and the future of Jerusalem has long been at the centre of the Middle East conflict.

The recognition has prompted the Palestinians to snub a Trump administration they accuse of bias on behalf of Israel, which counts all of the city holy to Jews, Christians and Muslims as its indivisible capital — a status not recognised abroad.

Palestinian officials boycotted a US-led conference in Bahrain last week which Washington said was meant to lay the economic foundations for peace with Israel.

Friedman, asked in a Jerusalem Post interview published on Sunday if he saw Israel one day agreeing to Palestinian control of Silwan as part of a peace deal, said: “It would be akin to America returning the Statue of Liberty.” In addition to Jerusalem, Palestinians fret that Washington will give a green light to a possible move by Israel to annex Jewish settlements in the West Bank.

Greenblatt told a Jerusalem conference sponsored by the conservative Israel Hayom conference last week that diplomatic progress might be possible “if people stop pretending (Israeli) settlements — or what I like to call neighbourhoods and cities — are the reason for the lack of peace”.