EU ambassadors in Israel are concerned over Israel's treatment of its Arab minority and about poor prospects for relaunching peace talks with the Palestinians, according to a working paper disclosed by daily newspaper Haaretz on Friday.
The newspaper said that in the document that the "breakdown in the peace process was having a negative impact on the integration of Israeli Arabs into society."
It quoted the document as saying "stalemate in the peace process, and the continuing occupation, inevitably has an impact on the identification of Israeli Arabs with Israel."
"It will be more difficult for Israeli Arabs to be wholly at ease with their identity while the conflict with the Palestinians continues."
The embassies said this should not be used as an excuse for "hostile behavior by Israeli Arabs which alienates the Jewish majority, or for failure by Israeli government to achieve genuinely equal treatment of Israeli Arabs."
Israeli Prime Minister Benjamin Netanyahu is demanding that Israel be recognised by the Palestinians as a Jewish state.
The Palestinians reject that, saying that it would lead to a renunciation of the right of return to those Arabs who fled or were driven out in 1948 when the state of Israel was proclaimed.
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They also say a Jewish state would alienate the rights of the Arab minority which stayed on in Israel.
"We do not believe that recognition of Israel as a Jewish state should detract in any way from the vision of equality for all its citizens enshrined in its founding documents," the paper says.
"It is in the interests of all Israelis to demonstrate that Israel is not only Jewish and democratic, but tolerant and inclusive, and that these are patriotic values. We believe in common with most Israelis that Israeli nationality is an inclusive concept which can accommodate equally those of other faiths and ethnic origins."
The paper was designated as a "food for thought" document after objections from some EU countries.
A senior Israeli official was asked to comment on it, but declined, saying the government had not officially received a copy of it.
However, speaking on condition of anonymity, he said it might represent "European interference" in the country's internal affairs.
Haaretz said that, in response to its story, the EU said "a core task of any diplomatic mission is to report back to its headquarters on developments in the host country."
In May, the University of Haifa published an opinion poll showing a deterioration of relations between Jews and Arabs in Israel.