The European Union has recommended that its 27 member states "prevent" all financial transactions that support Israel's settlement activities in the West Bank.

In its Jerusalem Report 2012, an internal report written by the EU mission heads in Jerusalem and Ramallah, the European Union suggested that member states "prevent, discourage and raise awareness about problematic implications of financial transactions, including foreign direct investments, from within the EU in support of settlement activities, infrastructure and services," the French news agency AFP reported.

In a strongly worded 15-page report, the EU also called on members to "ensure that imports of settlement products do not benefit from preferential tariffs and make sure that all such products are clearly labeled as originating from Israeli-occupied areas."

It also warns that EU programs should not be "used to support settlements and settlement-related activity, including funding for research, education or technological cooperation."

And it proposes that member states raise awareness about "the financial and legal risks involved in purchasing property or providing services in settlements."

The EU is Israel’s largest import and export market, and should it implement punitive trade sanctions it would affect the economy of the Jewish state significantly.

Israel officially considers all of Jerusalem its eternal, undivided capital and rejects the view that construction in the eastern sector is "settlement" construction.

In response to the report, Israel Foreign Ministry Spokesman Yigal Palmor said, "The role of a diplomat is to build bridges and bring people together, not to encourage conflict. In this way the heads of European missions have completely failed."

MK Rabbi Eli Ben-Dahan (Likud-Beytenu) also responded on Wednesday, saying, "We are once again witness to blatant intervention in the policies of the State of Israel, in a one-sided way favoring the Palestinians. The Europeans need to remember that the British mandate for Palestine ended 65 years ago. Today the State of Israel is an independent state."

"This report was meant to advance the delegitimization of the State of Israel throughout the world and especially in Europe. It is not acceptable that an official EU report would call important archaeological artifacts discovered in Israel a 'historical narrative' that intentionally ignores other religions. We must remind the Europeans that we are the world's oldest nation and they cannot ignore the artifacts that prove this."

"The State of Israel allows the Europeans to build projects in Area C to the tune of millions of euros," said Dahan. "If this is the attitude we get in return, I suggest rethinking this permission."

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