Israel is damaging the prospects for peace with Palestinians by grabbing land and violating civil liberties in East Jerusalem, according to an internal EU report.

During the Six-Day War in 1967 Israel invaded and occupied the city's eastern part, which is currently home to some 190,000 Israelis as well as 210,000 Palestinians and the third holiest site in Islam, the al-Aqsa Mosque.

Since 2004, it has demolished 400 Palestinian homes, with 1,000 more demolition orders pending. But since 2007, it has approved the building of almost 3,000 new Israeli housing units. Israeli settlements without building permits are rarely disturbed, the EU report says.

The 20-page document was drafted by the heads of EU member state embassies in Tel Aviv on 15 December and leaked over the weekend by the Israel Committee Against House Demolitions, a Jerusalem-based NGO.

"Israel is, by practical means, actively pursuing the illegal annexation of East Jerusalem," it says. "House demolitions in occupied east Jerusalem are illegal under international law, serve no obvious purpose, have severe humanitarian effects and fuel bitterness and extremism."

The housing policy problem is made worse by "discriminatory" spending on public services, leaving Palestinian areas with poor roads and sewage systems compared to Israeli districts.

The construction of a 725 kilometre-long security wall around East Jerusalem forces Palestinians in the West Bank to seek temporary passes to enter the city. In some cases, this leaves people unable to farm their land or obtain cancer treatment at specialised hospitals.

EU diplomats also voiced concern about Israeli "state collusion" in helping "extreme" settler groups organise archeological digs in religiously sensitive areas.

"In this manner, archaeology is becoming an ideologically motivated tool of national and religious struggle carried out in a manner that modifies the identity and character of the city and threatens to undermine its stability."

The EU maintains friendly links with Israel under a June 2000 "Association Agreement." On 9 December, it agreed to "upgrade" relations in an initiative which is to see regular bilateral summits and more trade.

The latest Gaza conflict - which claimed over 1,300 Palestinian lives - exposed divisions within the bloc, however. The European Commission paused talks on the upgrade. Ireland and Sweden also called for an enquiry into alleged Israeli war crimes, but Germany, Italy and the Netherlands opposed any probe.

Black and white

British liberal MEP Chris Davies told EUobserver that Brussels should suspend the Association Agreement over Israel's actions in East Jerusalem and Gaza.

"The idea that our close co-operation with a nation that is in military occupation of Palestinian land gives us 'influence' in shaping Israeli policy is a complete nonsense," he said.

Pro-Israeli commentators say the EU report lacks historical context, such as mention that Palestinians between 1948 and 1967 tried to "remove all signs of Jewish historical presence" and built "on land that they did not own."

"This is the reason that I and many other Jews chose to live in Jerusalem - to make the statement that we will not be moved again," political studies professor Gerald Steinberg of the Bar Ilan University in Ramat Gan, Israel, told this website.

"This [EU report] will increase distrust among many Israelis, for whom Jerusalem is the most sensitive dimension of the conflict."