Israel threatened on Monday to review its cooperation with European Union projects that benefit Palestinians in the occupied West Bank, citing the bloc's labelling of exports from Jewish settlements in the Israeli-occupied territory.
The Israeli Foreign Ministry announced on Sunday that Israel was suspending its contacts with European Union bodies involved in peace efforts with the Palestinians, condemning the EU guidelines on settlement products published on Nov. 11.
With talks on Palestinian statehood frozen since 2014, there seemed to little peace diplomacy for this decision to affect.
But the EU decision that goods produced in settlements be marked as such rather than "Made in Israel" touched a nerve in Netanyahu's right-wing government, which has long decried efforts by the BDS - boycott, divestment and sanctions - movement to isolate Israel over policies towards Palestinians.
Foreign Ministry spokesman Emmanuel Nahshon seemed to expand the scope of Israel's steps against the EU, a major donor to the Palestinian Authority that exercises limited self-rule in parts of the West Bank, by saying it could be frozen out of some initiatives aimed at bettering Palestinian lives.
"It is true that there is no peace process ... but the European Union wants to be involved in a variety of projects, some of them ... regarding Palestinian welfare," he said.
"With all those projects, we will need to re-examine whether it is feasible to consider the European Union as a partner while it is using measures of discrimination and boycott against the State of Israel."
Palestinian Foreign Minister Riyad Al-Maliki called the Israeli move a "stupid threat" that he said exposed arrogance and enmity towards the EU.
The Israeli foreign ministry made clear that contacts with individual EU countries - it named Germany, France and Britain - would not be affected by the move against EU projects with Palestinians.
In a sign that the Israeli move stopped short of any boycott of officials representing the bloc as a whole, Prime Minister Benjamin Netanyahu met with EU foreign policy chief Federica Mogherini on Monday in Paris, on the sidelines of the global climate conference.
"EU-Israel relations are good, broad and deep and this will continue," a European Commission spokeswoman told reporters in Brussels while announcing the meeting had taken place.
The spokeswoman played down the labelling decision as merely the implementation of an existing policy already being enforced by some EU states.
It would be difficult for Israel to block funding for EU projects in towns and villages under Palestinian Authority control, but plans for the West Bank's "Area C", where the Israeli military is solely in charge, could be another matter.
The bloc has set aside 10 million euros for housing and other projects for Palestinians in Area C and Israel has to approve or turn down such ventures. Some 100 initiatives are in the pipeline, with only a handful ratified so far.
The EU regards Israeli settlements on land Israel occupied in a 1967 war, which Palestinians seek for a future state, as illegal under international law. Israel has accused the bloc of a double standard, saying the EU was not taking similar steps in other territorial conflicts elsewhere in the world.
Israel's economy ministry estimated the new labelling would affect goods worth about $50 million a year, including grapes and dates, wine, poultry, honey, olive oil and cosmetics made from Dead Sea minerals.
That is around a fifth of the $200-$300 million worth of goods produced in settlements each year, but a small fraction of the $30 billion of goods and services traded annually between Israel and the European Union.
After the labelling decision was announced, some factory owners in West Bank settlements said their Palestinian workers would be most harmed by any drop in business since jobs were hard to find in the area.
An Israeli businessman who owns three factories in a West Bank industrial zone told Reuters the effect of the labelling would be minor and the products' quality, not their origin, would determine if they would sell abroad.
"Whoever wants to buy our products, will buy our products," said the businessman, who gave his name only as Zvi.