Twenty-seven European Union heads of mission have signed a scathing report denouncing Israel’s continued settlement activities as the “biggest single threat to peace” to a two-state solution.

The report denounced Israel's treatment of Palestinians in East Jerusalem. It also urged EU states "not to support ... research, education and technological cooperation" and to discourage investment in Israeli firms operating in occupied territory.

European countries, the report added, should consider barring entry to their territory of "known violent settlers".
The EU envoys said Arabs faced persistent problems in the city, including demolitions and evictions, "restrictive" planning, "discriminatory access" to religious sites, "inequitable" education and "difficult access" to health care.

It urges member states to withhold funding that helps settlement building directly or indirectly, and to ensure that goods produced on settlements do not benefit from preferential trade agreements with Israel.

They should “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,” it says.

The report, which was drafted over several months, was completed in January following a wave of new settlement announcements from Benjamin Netanyahu’s government that drew condemnation from the EU and the US.

In a damning section, it condemns Israel’s program of settlement expansion in east Jerusalem — claimed by Palestinian as their future capital - as deliberately designed to prevent the division of the city in any peace agreement.

Three settlements on the city’s southern tip — Gilo, Har Homa and Givat Hamatos — are singled out as “the most significant and problematic” obstacles to peace.

“The construction of these three settlements is part of a political strategy aimed at making it impossible for Jerusalem to become the capital of two states,” says the report.

“It will be difficult if not impossible to ensure territorial contiguity between east Jerusalem and the West Bank. As these three settlements grow, it will require ever more political will and capital to evacuate them or find alternatives.”

While past reports have lashed out at settlements, it is the first time the EU heads of mission have called for an effective embargo to curb them.

Senior Palestinian politician Hana Ashrawi welcomed the report and urged EU states to heed its recommendations.

"Now is the time to exercise the political will that is required to hold Israel accountable before any and all chances for peace are destroyed," she said in a statement.

Some 325,000 Jewish settlers live in the West Bank and a further 200,000 reside in East Jerusalem. Some 250,000 Palestinians also live in Jerusalem, which Israel annexed after 1967 in a move that was never internationally recognised.

Israeli Prime Minister Benjamin Netanyahu, defying international condemnation, has also pledged to build more than 3,000 settler homes in the so-called E1 corridor near Jerusalem.

The report said building in E1 "is set to cut off East Jerusalem from the rest of the West Bank". Israel, which announced the project after the United Nations granted de facto recognition to a Palestinian state last November, has said construction in the area is at least a year away.