Israel announced on Sunday it was unilaterally suspending the European Union's role in the peace process with the Palestinians following the bloc's decision to explicitly label goods produced in Israeli settlements in the West Bank.
The EU approved new guidelines last month stating that Israeli exporters must explicitly label farm goods and cosmetics that come from settlements when they are sold in member states — a move European officials said was technical, not political, but which was met with anger and outrage in Israel.
After initially mulling filing a lawsuit against 28-member bloc with World Trade Organization Israeli Prime Minister Benjamin Netanyahu announced on Monday that his country's foreign ministry would instead be carrying out "a reassessment of the involvement of EU bodies in everything that is connected to the diplomatic process with the Palestinians."
"Until completion of the reassessment, the Prime Minister has ordered a suspension of diplomatic contacts with the EU and its representatives in this matter," a ministry statement said.
Foreign Ministry spokesman, Emmanuel Nahshon, also said that Israel was considering freezing EU out of initiatives aimed at bettering Palestinians lives in areas of West Bank that are partly administered by the Palestinian Authority but did not name specific examples.
"We will not involve the European Union in what is happening here in terms of the peace process until we understand exactly what are their choices and what is their policy," Nahshon told reporters. "We will need to reexamine whether it is feasible to consider the European Union as a partner while it is using measures of discrimination and boycott against the state of Israel," he added.
Responding to Netanyahu's announcement EU foreign affairs chief Federica Mogherini asked for "clarification" on the suspension, which European officials have largely dismissed as symbolic after Israel said the "suspension" would not affect contact with individual countries, such as France, Germany and Britain.
"EU-Israel relations are good, broad and deep and this will continue," Maja Kocijancic, European Commission spokesperson, said at a global climate conference in Paris attended by Netanyahu on Monday.
"When it comes to the Middle East peace process, the EU continues and will continue to work on this… because of course the peace in the Middle East is of interest to the whole international community and of course to the Europeans themselves," she added.
Israel has been angered by the new labeling guidelines — drawn up over three years by the European Commission — seeing them as an extension of support to the broader Boycott Divestment and Sanctions movement, which advocates for a wholesale ban on Israeli products and culture.
The EU's position is that the lands Israel has occupied since the 1967 Middle East war — including the West Bank, East Jerusalem and the Golan Heights — are not part of the internationally recognised borders of Israel.
As such, goods from there cannot be labelled "Made in Israel" and should be labelled as coming from settlements, which the EU considers illegal under international law.
"It's an indication of origin, not a warning label," the EU ambassador to Israel, Lars Faaborg-Andersen, told Reuters after the bloc's decision was announced.
Britain, Belgium and Denmark already affix labels to Israeli goods, differentiating between those from Israel proper and those, particularly fruit and vegetables, that come from the Jordan Valley in the occupied West Bank. But following the decision, all 28 EU member states will have to apply the same labeling.
Netanyahu has called the EU decision "hypocritical and a double standard", pointing out the EU was not taking similar steps in hundreds of territorial conflicts elsewhere in the world. Among the examples frequently cited by Israeli politicians are northern Cyprus, and the Western Sahara.
"The European Union should be ashamed of itself," Netanyahu said while on an official visit in Washington earlier this month. "We do not accept the fact that Europe is labeling the side being attacked by terrorist acts."
According to Israel's economy ministry the new labeling rules will affect goods worth about $50 million a year, including grapes and dates, wine, poultry, honey, olive oil and cosmetics made from Dead Sea minerals.
That is around a fifth of the $200-$300 million worth of goods produced in settlements each year, but a drop in the ocean next to the $30 billion of goods and services traded annually between Israel and the European Union.
Israeli farmers and wine growers in the West Bank have expressed worry about the impact on their business and some have begun diversifying into markets in Russia and Asia to escape EU rules.
The development of settlements has been one of the major obstacles to negotiations between Israel and the Palestinians, both during and following the break down of US-backed peace in April 2014.
Earlier this month Israeli newspaper Haaretz broke the news that the government had approved the construction of an additional 2,200 settlement units just hours before Netanyahu visited Washington to meet with US President Barack Obama. The news echoed a 2010 diplomatic slight when Israel approved a raft of settlement construction on the eve of a visit from Vice President Joe Biden even though the Obama administration, had called for a halt in settlement construction to make room for peace talks.
Commenting on Israel's decision to suspend contact with the EU over the peace process Saeb Erekat, Secretary General of the Palestinian Liberation Organisation, said that Netanyahu was "blackmailing the international community."
"This is a disingenuous step from a government that has repeatedly rejected the two-state solution, both in their political program and on the ground." he added.