A European Union report obtained by AFP on Thursday says that booming Israeli settlement in the West Bank and limits on Palestinian movement and building are eroding chances of a Palestinian state.
The report urges member states "in coordination with other international actors" to "systematically voice objections" to measures to evict Palestinians from areas under Israeli control.
Unlike many reports on general conditions in the Palestinian territories, the 16-page internal study by EU heads of mission in Jerusalem and Ramallah focuses on the Israeli-run Area C, which makes up 62 percent of the occupied West Bank.
"Area C comprises crucial natural resources and land for the future demographic and economic growth of a viable Palestinian state," says the report.
A 1995 interim accord between Israel and the Palestinians divides the West Bank into Area A (under full Palestinian control), Area B (under shared Israeli-Palestinian control) and Area C.
The latter includes the border with Jordan which Israel insists must remain under its military control in any agreement with the Palestinians.
Although it is home to only 5.8 percent of the West Bank Palestinian population -- excluding Israeli-annexed east Jerusalem -- the report says that Area C is a vital component in a future Palestinian state based on the borders which predated Israel's occupation in the 1967 Six-Day war.
"If current trends are not stopped and reversed, the establishment of a viable Palestinian state within the pre-1967 borders seems more remote than ever," it added.
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"The window for a two-state solution is rapidly closing with the continued expansion of Israeli settlements and access restrictions for Palestinians in Area C."
The study, entitled "Area C and Palestinian State Building," is dated July 2011 but has been kept confidential until now.
It follows an unprecedented report by EU ambassadors in Israel made public last month which voiced concern about the Jewish state's treatment of its Arab minority, and looks likely to place further strain on EU-Israel relations which have been frosty of late.
After the four European members of the UN Security Council (Britain, France, Germany and Portugal) condemned Israel's expanding settlement construction, the Israeli foreign ministry released an angry statement saying that those European states risked making themselves "irrelevant."
Speaking on condition of anonymity, an Israeli official said that the Area C report was "far worse" than the Security Council move.
"There is an invalid methodology here which is repeating itself," he said. "They prepare reports in secret on things concerning us without getting from us information or a reaction or any kind of comment, relying only on material from the Palestinians, directly or indirectly."
"There is forethought here by the consuls... to place themselves at the service of the Palestinian political and propaganda struggle."
EU foreign policy chief Catherine Ashton's spokesperson said the report was aimed at helping peace efforts.
"The report on Area C is intended to serve as a source of information for the European Union and as an input to its policy-making process," Maja Kocijancic said in a written response to an AFP query.
"As such, it should assist the EU in determining how best to achieve the objective of a two-state solution to the Middle East peace process."