The measure, which comes into effect recently, bans any EU funding or co-operation with Jewish communities in the West Bank and east al-Quds, captured in the 1967 Six- Day War, and the Golan Heights, seized from Syria in the same conflict.

Netanyahu, after holding emergency consultations with senior ministers, declared that Israel would not accept European dictates concerning its borders.

He also vowed that the government would stand by the hundreds of thousands of settlers.

The EU has always maintained a policy that Israeli settlements are illegal under international law, but until now has worked with Israel based on quiet understandings that the EU agreements cover only pre-1967 occupied lands.

“Now this has become a formal, binding policy,” a senior Israeli official said, describing the move as “an earthquake”.

The EU is Israel’s biggest trading partner, with total trade amounting to €29.4 billion in 2011.

More than a third of Israeli imports come from EU states and the bloc purchases more than a quarter of Israeli exports.

Charge d’affaires of the EU delegation to Israel, Sandra De Waele, said the decree did not represent a new policy but meant that for the first time any agreement signed between the EU and Israel would have to contain a clause excluding settlements.

She acknowledged that the move reflected ongoing European displeasure over Israeli illegal settlement activity.

NJF/NJF