A top European Union official warned on Wednesday that both Israel and the Palestinians would have a "price to pay" if US-led peace talks collapse.
Speaking to reporters in Jerusalem, Lars Faaborg-Andersen, the EU's ambassador to Israel, also rebuffed charges by Prime Minister Benjamin Netanyahu that Europe was showing a pro-Palestinian bias.
And he warned that persistent Israeli construction on land seized during the 1967 Six Day War was fuelling private European moves to boycott products and services linked to the settlements.
"It is obvious, and we have made it clear to the parties, that there will be a price to pay if these negotiations falter," he said.
US Secretary of State John Kerry coaxed the two sides back to the negotiating table in July with the aim of securing an agreement within nine months. But the talks have shown very little visible progress, overshadowed by disagreements on security and a flurry of settlement announcements.
Since January 1, Israel has pushed ahead with plans for another 2,791 new settler homes in the West Bank, including annexed east Jerusalem, sparking a wave of international condemnation.
By continuing to build up the settlements at the expense of a peace agreement, Israel was likely to find itself more and more shunned by the European public, the envoy warned.
"If Israel were to go down the road of continued settlement expansion and were there not to be any result of the current talks, I'm afraid that what will transpire is a situation in which Israel will find itself increasingly isolated," he said.
"Not necessarily because of any decisions taken at a governmental level but because of decisions taken by a myriad of private, economic actors, be it companies, pension funds or consumers, who will be choosing other products on the supermarket shelves."
Signup to our newsletter and follow us on Facebook and Twitter!
Faaborg-Andersen said moves within Europe to require separate labelling for goods manufactured in the settlements were gathering pace every time Israel announced a new round of construction.
"I think it is gaining momentum every time there is a settlement announcement here, and that's one of the reasons why these are very counterproductive, both for the negotiations but also because they don't play in a good way with the public and also the political class in Europe."
So far, such initiatives are in place in Britain and Denmark, and Sweden, Finland and the Benelux countries are looking into it, he said.
Last week, four key European states summoned Israeli ambassadors to protest over new settlement construction, which Netanyahu denounced as "hypocritical," saying the EU was unfairly singling out Israel and lacked "balance and fairness."
But Lars Faaborg-Andersen denied the charge.
"We are passing on messages to both parties, so I don't see any basis for the allegation that we are being one-sided, of not being even-handed on this issue," he said.
"Given this very delicate stage and the high stakes, we are very critical of any developments on the ground that could threaten this very fragile process, and that cuts across the board," he said, citing EU criticism of Palestinian rocket fire from Gaza and incitement.
Asked what kind of price the Palestinians could be expected to pay if the talks failed, he said: "It has been made very clear to the Palestinians that the option of just sitting around waiting isn't really an option."
Although he did not comment directly on press reports suggesting the EU could cut aid to the Palestinian Authority, he noted the "very substantial hole" in the Palestinian budget due to a drop in funding from the Arab states and said the prospect of the EU picking up the tab "might not be very realistic."
"We would like to continue on the basis of what we're doing, but we would like to see a political perspective," said his colleague John Gatt-Rutter, the EU representative to the West Bank and Gaza, noting the economic situation in Europe and competing demands for funds, particularly from Syria and Egypt.