Israel's Shin Bet security agency says it arrested three Palestinian men, two from Israeli-controlled east Jerusalem and one from the West Bank, over the plot.
It said those arrested admitted to planning a suicide bombing at the embassy and other attacks.
It said they received their instructions over the Internet through a handler in the Gaza Strip who had direct ties to al-Qaeda leader Ayman al-Zawahri.
"Al-Qaeda cannot operate here," Damiri said. "It needs broad logistical support and that cannot be here in this small area."
He said Israel had arrested some naive "boys" and claimed they were al-Qaeda to halt American pressure to show more flexibility in peace talks.
Israel has demanded it retain a presence in parts of the Palestinian-claimed West Bank after any future peace deal due to security concerns.
One of the suspects was identified as Ala Ghannam, 21, from Aqaba, a village near the northern West Bank town of Jenin.
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