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The EU move came to light as U.S. Secretary of State John Kerry, who is attempting to revive Israeli-Palestinian peace talks, embarked on his sixth visit to the Middle East since taking office in February.
The guidelines are in line with a call by EU foreign ministers last December for all agreements between Israel and the EU to “unequivocally and explicitly indicate their inapplicability to the territories occupied by Israel in 1967.”
The EU, which has been pressing for direct talks to resolve the Israeli-Palestinian conflict, has taken a strong stance against Israeli plans to expand settlements in the West Bank, saying it would undermine prospects for a negotiated solution.
Some 500,000 Israelis have settled in the West Bank and East Jerusalem among about 2.5 million Palestinians. Palestinians seek a state in the West Bank and Gaza Strip, with East Jerusalem as its capital.
Israel signalled its concern that Palestinians would now feel emboldened to stick to their demand that settlement construction be frozen before any resumption of peace talks that collapsed over the issue in 2010.
Israeli officials have voiced alarm over escalating attempts by pro-Palestinian campaigners in Europe to isolate the country through academic and commercial boycotts over its settlement policies.
“I think Europe is proving again just how detached it is and how it cannot truly be a full partner in (Israeli-Palestinian) negotiations,” Israeli Energy Minister Silvan Shalom told Army Radio.
Hanan Ashrawi, a senior member of the Palestine Liberation Organization, said the EU had moved beyond “statements, declarations and denunciations” over Israel’s settlement policy and made a “qualitative shift” that would improve peace prospects.
Zeev Elkin, Israel’s deputy foreign minister, said the EU’s “very worrisome step” came at a bad time.
Israel, which has urged the Palestinians to return to talks unconditionally, disputes the view of the EU, the International Court of Justice, and most countries that the settlements are illegal. It regards all of Jerusalem as its capital, a claim that has not won international recognition.
Maja Kocijancic, a spokeswoman for EU foreign policy chief Catherine Ashton, said the Commission drew up the guidelines in response to a request from the European Parliament and said they clarified a system that the EU was already applying.
She said there had been a small number of cases in the past where Israeli organisations operating in the occupied territories had received EU funds, but she could not provide a figure for the potential financial impact of the measure.