Dutch water supplier Vitens has ended a partnership with Israeli water company Mekorot due to the "political context", the Dutch company said on Wednesday.
The abrupt decision comes days after a visit to the Mekorot offices in Israel by the Netherland's trade minister Lilianne Ploumen was abruptly cancelled.
In a statement, Vitens said it had come to the conclusion that it was "extremely hard" to work with Mekorot on future projects "because they cannot be taken out of the political context."
The company visit was part of a larger tour of Israel by Prime Minister Mark Rutte that was marred by a dispute over a Dutch-made security scanner on the Gaza border.
Rutte was to have inaugurated the scanner on the frontier with the Palestinian Islamist-ruled strip, but the ceremony was broken off.
The focus of the dispute is trade between Gaza and the West Bank, which is controlled by the Palestinian Authority under president Mahmud Abbas.
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Israel's defence ministry wants to isolate the two Palestinian regions, while Dutch officials had hoped the scanner might boost commerce between them.
Mekorot, which provides water to Israeli towns and to Jewish settlements in the occupied Palestinian territories, has been accused by Dutch media of denying water access to Palestinians.
According to the World Bank, a third of Palestinian territories are cut off from the Israeli water system and Israelis draw out a far bigger share of the water supply than agreed in the 1995 Oslo 2 accord.
Israeli deputy Foreign minister Zeev Elkin said he was "blindsided" by the pullout "and a few more European companies have made similar decisions in the past months, which have blindsided us exactly in parallel with the peace process.”
In talks last week, Israel, Jordan and the Palestinians signed a historic water-sharing initiative at the World Bank that could protect water resources in the region amid rising demand.
The deal will see Israel, working through Mekorot, boosting its annual sales of water to the Palestinian Authority by 20-30 million cubic meters a year, up from the current level of 52 million cubic meters.
Zeev, speaking to Israeli military radio, said that peace initiatives should mean "that people don’t breathe down our neck", but "unfortunately this doesn’t work."
Vitens said the decision to end the Mekorot tie-up was made after conferring with the Dutch foreign ministry and other "concerned parties".