Israel on Sunday signed a key European-funded scientific research programme despite guidelines barring funding to settlement-linked projects, officials said.
The signing of the Horizon 2020 agreement took place at a ceremony in Jerusalem presided over by Prime Minister Benjamin Netanyahu and outgoing European Commission President Jose Manuel Barroso.
"Horizon 2020 offers a huge opportunity to enhance the traditionally active cooperation between Israeli and EU innovators. Under terms of the agreement, Israel will have the same access to the programme as EU member states," the European Commission said.
Signing the deal, which makes Israel the only non-European country to benefit from the programme, was made possible after the sides reached a compromise over guidelines which bar all funding for entities operating on land seized during the 1967 Six Day War.
The guidelines angered Israel because it would have meant recognising in writing that the settlements -- which are illegal under international law -- are not part of the Jewish state in any future EU agreements.
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But under terms of a compromise reached late last year, it was agreed that Israel could add an appendix stating its non-recognition of the new guidelines.
Since the EU said it would stop grants and funding for any Israeli entity operating over the 1967 lines, a growing number of international bodies have taken similar steps to cut ties, in a move that has sparked alarm in Israel.
Israel's ongoing settlement building has been flagged up by Washington as a key factor in the collapse of the US-led peace talks in April and has triggered repeated problems in its relationship with Europe.
In an editorial in the left-leaning Haaretz newspaper on Sunday, Barroso warned that if there was no forward movement in peace efforts, the EU's "disengagement" from the settlements would speed up.
"If no peace negotiations take place dan no progress is made, the EU and Israel will have to address contentious and divisive issues, including further acceleration of the EU's policy of disengagement from the settlements," he wrote.
Late last year, the EU's representative to the peace process warned that if the ongoing peace talks failed, the campaign to clearly label products as made in the settlements would gain pace.