The United States has agreed to sell its embassy building in Grosvenor Square, Mayfair, to Qatari Diar, the sovereign wealth-backed developer, for an undisclosed sum.

The US State Department said that it will sell the Chancery building, home to the US Embassy in Britain for almost half a century, to the property investment company owned by the Qatar Investment Authority (QIA).

The building was worth an estimated £500 million at the peak of the market in July 2007 when Qatari Diar was first linked with a possible purchase. However, the building is now thought to be worth less after a 45 per cent decline in commercial property values.

The development value of the site also suffered a setback last month when English Heritage granted Grade II listed status to the building, designed by the American architect Eero Saarinen, for being a "really important piece of Modernist architecture". The listing means that the new owners will not be allowed to change the facade, which includes the famous 35 ft gilded aluminium eagle that hovers above the main entrance.

The prime location of the building, which has 600 rooms on nine floors, was said to be the principal appeal of the site for Qatari Diar. It is responsible for buying national and international property assets with the proceeds from the sale of the Gulf state's vast natural resources.

The Qatari investment group has not yet given full details of its plans for the site, but it is thought to be planning a luxury hotel and residential apartments. Chelsfield Partners, run by Sir Stuart Lipton and Elliott Bernerd and 20 per cent owned by QIA, will be development partners on the project.

Ghanim bin Saad al-Saad, chief executive of Qatari Diar, which plans to invest £5 billion in the UK, said: "Qatari Diar is looking forward to creating the world class mixed-use development that such a landmark site deserves. The purchase of such a prestigious London property underscores the continuing importance of the UK market for Qatari Diar."

Qatari Diar is still the subject of legal claims for unpaid fees from Candy & Candy, the developers, and Lord Rogers of Riveside, both of whom were employed to work on plans for the Chelsea Barracks site, which Qatari Diar bought for £1 billion in 2007. The investment group was recently forced to scrap and redraw a blueprint for the scheme after Prince Charles objected to the previous design.

The sale of the embassy building could still fall through. Qatari Diar's purchase does not become unconditional until 2012. Before then, it remains subject to delays in the construction of the new £500 million US Embassy in Wandsworth, due for completion in 2017, which could be hampered by planning permission. The embassy will remain in the Chancery until its new building is complete.

Wandsworth Council has granted outline consent for the new scheme on a five-acre site in the Nine Elms regeneration area that includes Battersea Power Station. The US, which is advised by Cushman & Wakefield, the property consultancy, will apply for detailed consent this time next year, after the appointment of architects next January and wider consultation.

The US will choose between Morphosis, Kieran Timberlake, Richard Meier & Partners and Pei Cobb Freed & Partners, all US-based architects.

The US wants the building to be "open, inviting and inclusive" to reflect the change in administration of its Government, according to Cushman & Wakefield. The Chancery building had previously been criticised for being too intimidating.

William Jackson, of Cushman & Wakefield said: "There will be lots of consultation and debate. We want to be totally open about the building plans. The building itself, set in a park, will be open and inviting to reflect the more inclusive style of the new US Government. There will be no concrete pillars."

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