Israeli Prime Minister Benjamin Netanyahu on Tuesday angrily rejected European Union guidelines barring the bloc's 28 member states from funding projects in Jewish settlements.
"We shall not accept any external dictates on our borders," his office quoted him as telling an emergency ministerial meeting. "That is an issue that will be decided only in direct negotiations between the sides."
Netanyahu convened his justice and trade ministers and his deputy foreign minister after the EU revealed the guidelines, which will affect all EU grants, prizes and funding from 2014 onwards, with none made available to Israeli entities beyond the 1967 Green Line.
The Palestinians have welcomed the guidelines but Netanyahu said the Europeans appeared to have a distorted sense of priorities.
"I would expect those who concern themselves with peace and stability in the region to only debate such an issue after resolving problems which are slightly more urgent, such as the Syrian civil war or Iran's race to obtain nuclear weapons," he said.
Israeli settlements in the West Bank, including annexed east Jerusalem, are viewed as illegal under international law.
"It should not come as a surprise that the EU supports international law in Middle East peace efforts," Swedish Foreign Minister Carl Bildt tweeted in response to Netanyahu's comments.
A senior Israeli official said the EU move could hinder diplomatic efforts by US Secretary of State John Kerry to revive stalled Israeli-Palestinian peace talks.
"Some in Europe seem to be determined to undermine this effort and to undermine the chance of returning to direct Israeli-Palestinian peace talks," he told AFP. "Why would any Palestinian leader enter negotiations when they receive what they want without negotiation?".
Kerry was in Jordan on Tuesday for his sixth Middle East visit in as many months and was to meet Palestinian president Mahmud Abbas in the evening for a private dinner.
Direct Israeli-Palestinian peace talks have been on hold for nearly three years, with the Palestinians refusing to negotiate without a freeze on settlement activity and Israel's acceptance of the 1967 lines as the basis for final status negotiations.
Israel says it wants talks, but without any such "preconditions".
Settlement watchdog Peace Now said Israel was expected on Wednesday to approve the construction of 1,071 new homes in six West Bank settlements.
"These approvals are part of an unprecedented wave of advancing settlement plans," the watchdog said in a statement.
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"This is yet another message by Israel to the US and the Palestinians that this government is not ready for peace."
An high-ranking Israeli official described the EU move as an "attack" on the Jewish state while another slammed it as an "earthquake" with both practical and political significance
But Palestinian official Hanan Ashrawi welcomed the guidelines, which are to be formally published on Friday.
"The EU has moved to... concrete steps which constitute a qualitative shift that will have a positive impact on the chances of peace," she said.
The guidelines require that in all signed agreements with Brussels a clear distinction be made between Israel and the territories it occupied in the 1967 Six-Day war -- the Golan Heights, the Gaza Strip and the West Bank including mainly-Arab east Jerusalem.
The aspect which has most angered Israel is the "territorial eligibility" clause which means that from 2014, only territories within the 1967 borders will be considered eligible for EU funding.
"This is the first time such an official, explicit directive has been published by the European Union bodies," a senior Israeli official told Haaretz newspaper.
"Until today there were understandings and quiet agreements that the EU does not work beyond the Green Line; now this has become a formal, binding policy.
"From now on, if the Israeli government wants to sign agreements with the European Union or one of its member states, it will have to recognise in writing that the West Bank settlements are not part of Israel."
A spokeswoman for EU foreign policy chief Catherine Ashton said there had been no change in policy.
"It's not a new approach," Maja Kocijancic said in Brussels, adding the guidelines would "bring clarity into this system".
Defence Minister Moshe Yaalon said Israel would continue to treat the West Bank according to what it saw as its own vital interests.
"It is not new that many countries around the world refer to Judaea and Samaria as occupied territory and they act accordingly," he said told reporters, using the biblical term for the West Bank.
"We have our policy concerning Judaea and Samaria and we shall continue to act according to our policy and our interests."