The BBC's Jeremy Bowen reports from Jerusalem's old city

The settlers, who belong to a far-right group known as Ateret Cohanim, moved out early on Thursday under police escort and watched by a crowd of local Palestinian residents.

The settlers said their decision followed an agreement with the Israeli authorities, and added that they would return.

A senior Palestinian official, Faisal Husseini, said his understanding was that the site taken over by the settlers would now come under the control of the Israeli Antiquities Authorities.

On Tuesday, the Mayor of Jerusalem, Ehud Olmert, gave the settlers 24 hours to evacuate the site on the grounds that they did not have building permits.

An Israeli court also ordered the settlers to stop building.

Palestinian officials beaten

Israeli police clash with Palestinian Legislative Council members

Earlier, senior members of the Palestinian Legislative Council were beaten by Israeli police in East Jerusalem. resulting in at least one man being taken to hospital.

They were attempting to stop the Jewish settlers from constructing the homes at the site.

The settlers, from an ultra-nationalist group, aim to settle the old city of Jerusalem with Jews and began the latest round of construction in response to the nearby murder of a Jewish student earlier in the month.

They laid foundation stones and erected tin sheds, but Palestinian and Israeli peace activists gathered to protest against the building and a group of Palestinian MPs, including leading cabinet ministers, later tried to get into the site to join them.

When Palestinians tried to occupy one of the settlers' sheds, a riot started.

Israel captured East Jerusalem from Jordan in the 1967 Arab-Israeli war and claims all of the city as its "eternal" capital.

Palestinians regard East Jerusalem as the capital of a future state. The final status of the city is due to be determined in future Israeli-Palestinian negotiations on a permanent peace agreement.