Israeli Prime Minister Benjamin Netanyahu said the EU "should be ashamed" of the long-awaited decision to approve guidelines for member states to put labels on goods from Jewish settlements in the occupied territories.
The EU however insisted that it was just clarifying existing rules on the place of origin for goods that will go on sale in the 28-nation bloc.
Agricultural and cosmetic goods, which under EU law must carry an indication of origin, should now include the words "Israeli settlement" on their labels, according to the guidelines.
Jewish settlements in the Palestinian territories of the West Bank and annexed east Jerusalem and in the Golan Heights -- all occupied by Israel in the 1967 Six Day War -- are deemed illegal under international law.
Israel has mounted a long and vocal campaign against the labelling plan first proposed by the EU in 2012.
It reacted angrily to the move, immediately summoning the EU's ambassador to the foreign ministry to receive a protest.
- 'Dark memories' -
"The labelling of products of the Jewish state by the European Union brings back dark memories. Europe should be ashamed of itself, it took an immoral decision," Netanyahu said in a video message as he wrapped up a trip to Washington.
"Of the hundreds of territorial conflicts around the world it chose to single out Israel, and Israel alone, while it's fighting with its back against the wall against a wave of terror," he said, referring to a series of stabbings of Israelis by Palestinians.
"This will not advance peace, it will certainly not advance peace and justice, it's wrong."
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In September, Netanyahu likened the labelling plan to what he said were similar labels placed on Jewish products in the Nazi era, while on Tuesday Israeli Energy Minister Yuval Steinitz called the labelling plans "disguised anti-Semitism".
Trade from settlements accounts for only a small portion of commerce between the EU and Israel, but carries important symbolic weight.
Israel's foreign ministry said that the "exceptional and discriminatory" labelling decision "does not advance any political process between Israel and the Palestinians".
The EU is part of the so-called Quartet, set up in 2002 to promote the peace process, along with the United Nations, the United States and Russia, although the process is currently moribund.
- 'Technical not political' -
The Palestinians -- for whom the settlements are being built on land that they see as part of their future state -- welcomed the move.
"EU labelling of settlement products is a step in the right direction but insufficient," the Palestine Liberation Organisation's (PLO) negotiations affairs department said on Twitter.
PLO secretary-general Saeb Erekat meanwhile said the labelling decision was a "significant move toward a total boycott of Israeli settlements."
Brussels tried to play down the decision and avoid a new row with Israel, with whom relations are already strained after the EU repeatedly condemned settlement building and several European countries recognised a Palestinian state.
The labelling move was "a technical issue not a political stance" and based on European consumer laws about indications of origin, European Commission vice-president Valdis Dombrovskis insisted.
"The EU does not support in any form a boycott or sanctions against Israel," the Latvian official added.
The new guidelines state that "since the Golan Heights and the West Bank (including East Jerusalem) are not part of the Israeli territory according to international law, the indication ‘product from Israel' is considered to be incorrect and misleading.'"
"Expressions such as 'product from the Golan Heights (Israeli settlement)' or 'product from the West Bank (Israeli settlement)' could be used," it added.