RAMALLAH // Europe is to ban cooperation and financial assistance to Israeli institutions operating in the occupied territories.
The new European Union measures ban the 28-member bloc from signing deals with Israel in business, science and sport unless they explicitly exclude areas in which Jewish settlers live.
The rules, which take effect next year, distinguish between the state of Israel and the land it captured after the 1967 war, including the West Bank, East Jerusalem and the Golan Heights, where more than 500,000 Israelis live in settlements illegal under international law.
"This sets a precedent for the whole world," said Hanan Ashrawi of the Palestine Liberation Organisation. "We find this extremely encouraging, and Europe is deciding to put its money where its mouth is."
Israeli reaction was confused. Some said the rules would have little effect, but one official said the decision was an "earthquake" and prime minister Benjamin Netanyahu called an emergency ministerial meeting to reject it.
"We shall not accept any external dictates on our borders," Mr Netanyahu said. "That is an issue that will be decided only in direct negotiations between the sides."
The new guidelines will cover central EU funding and will not affect contracts between individual European governments and Israel. They will, for example, affect an exchange programme known as EuroMed Youth, which is currently being negotiated.
The announcements highlight European frustration with Israel's policy towards Palestinians, who refuse to return to peace talks with Mr Netanyahu's government unless it stops building settlements.
It is the first move taken by the EU against Israeli settlements, although European officials are thought to be close to introducing new product-labelling guidelines to single out settler goods.
Already introduced last year by South Africa and Denmark, the labelling rule would allow consumers to identify and boycott settlement-made goods if they wish.
Nevertheless, the EU move may add momentum to other efforts to isolate Israel internationally over its occupation of the West Bank, Gaza Strip and East Jerusalem, such as the boycott, divestment and sanctions movement.
Gershom Gorenberg, an Israeli journalist, historian and expert on settlements, said the guidelines would have little commercial impact because they do not cover trade in goods and produce from settlements, which contribute little to the Israeli economy.
However, It may affect efforts by John Kerry, the US secretary of state, who returns to the region for a sixth time this year to try to revive the Israeli-Palestinian peace process.
Mr Gorenberg said the EU could have quietly coordinated the anti-settler move with the United States to pressure Israel with a "good cop, bad cop" scenario. "The Americans, for their own domestic political reasons, can't take a measure like this even though American policy also says that the occupied territories are not part of Israel," he said.
"So in a sense, there could be a bit of good cop, bad cop here - with Kerry pressing for negotiations and the Europeans applying this pressure."
Mr Gorenberg also said the EU move could be perceived as pro-Israeli because there is "a sense here of confirming Israel's legitimacy" by distinguishing it from the occupied territories.
But Israeli settlers rejected that notion. And Dani Dayan, who acts as the foreign envoy for the Yesha Council, which represents settlers, doubted the EU move would have much impact on the settlement project.
"The practical effect won't be major," he said. "We build our communities without European official assistance and they will keep thriving without European assistance."