EU considering 'sanctions' against Israel over settlements "We've been increasingly concerned at what we've been seeing," one European diplomat said. There doesn't seem to be any possibility of advancement at the moment. There is concern about settlement activity that would have a serious impact on a two-state solution. Penalising steps could be triggered by Israeli "game changing" decisions such as building in a sensitive spot known as E1 between Jerusalem and the settlement of Maale Adumim, which Palestinians say would impair the contiguity of any future state. European officials have been alarmed by a series of recent announcements, including the seizure of 1,000 acres of Palestinian land near the Gush Etzion settlement and a decision to press ahead with the expansion of Givat Hamatos, officially in Arab-dominated East Jerusalem, which would potentially block access to the city for Palestinians coming from the southern West Bank. There has also been disquiet over the move by several hundred Jewish settlers to the Arab neighbourhood of Silwan in East Jerusalem. The document is believed to suggest a range of options, including compulsory labelling on Israeli products made in West Bank settlements, limiting cooperation with Israel and even imposing restrictions on an existing free-trade agreement, according to Haaretz newspaper. The proposed penalities drew a robust response from Avigdor Lieberman, the Israeli foreign minister, who said Israel's relations with Europe should not be linked to its conflict with the Palestinians. "There is no place for linking the bilateral relations between Israel and the European Union to the relations between Israel and the Palestinians," Mr Lieberman said after a meeting with Frank- Walter Steinmeier, his visiting German counterpart. One thing should be clear: we will never accept the definition of building in Jewish neighbourhoods of Jerusalem as settlement activity. We won't accept any limitation on building in Jewish areas of (east) Jerusalem. Israel reacted angrily last year when the EU issued guidelines forbidding the use of European grants or funds by Israeli companies or organisations operating in settlements. The latest controversy came as a scheduled vote by a powerful government committee on a highly contentious bill to officially designate Israel as a Jewish state was abandoned at the last minute after a cabinet split. Tzipi Livni, the justice minister, used her powers as chairman of the ministerial committee for legislation to postpone the vote, provoking fury amongst Right-wing colleagues. Critics say the proposed legislation - which would downgrade Arabic from its current status as an official state language - would elevate Israel's Jewishness at the expense of its democratic character, while weakening the rights of its 1.5 million-strong Arab minority. Benjamin Netanyahu, Israel's prime minister, had earlier unequivocally declared his support at a cabinet meeting on Sunday, while dismissing criticisms that it would undermine democracy. "We are being challenged by the unwillingness to recognize the right of the Jewish People to a state of its own," he said. Israel is a Jewish and democratic state. Democracy here finds expression in the right of every person to vote in secret elections.