An EU report suggests Jerusalem has reached a dangerous boiling point of ‘polarization and violence.’ The account, published by the Guardian, says the EU may take a tougher line against Israel as it continues to build illegal settlements in the city.

The report is prepared annually by the European countries' missions in Jerusalem, who advise EU foreign policymakers. The leaked text, obtained by the Guardian newspaper, describes the emergence of a “vicious cycle of violence … increasingly threatening the viability of the two-state solution,” which it says has been stoked by the continuation of “systematic” settlement building by Israel in “sensitive areas” of Jerusalem.

The UK publication states that according to well-informed European sources, the report now being discussed in Brussels shows that European governments are considering introducing additional measures against Israel. This is due to the country’s stance of continuing to build settlements in disputed areas in Jerusalem.

Netanyahu proudly declares that building settlements like Har Homa was designed to cut #Bethlehem off from #Jerusalem. So it's true #EU — Luke Baker (@LukeReuters) March 16, 2015

The report comes hot on the heels of the recent Israeli election, which saw conservative Benjamin Netanyahu elected for a fourth term. During campaigning, the Israeli Prime Minister said there would be no two-state solution to the Palestinian question, and he also advocated continued settlement building in disputed territories, including East Jerusalem.

Both the US and EU have called for the creation of a two-state solution as the only way to push the peace process forward. The report, citing European sources, states that the EU is considering introducing a tougher line against Israel regarding issues such as settlement building, while the US has said it will reassess its relationship with Israel following Netanyahu’s re-election.

READ MORE: Europe 'losing patience' over Israeli settlement policy – EU envoy

The document describes Jerusalem as “one of the most emotive and problematic issues” in the Middle East peace process, with the report adding, “the tensions, mistrust and violence which have accompanied developments in the city in the course of the year have reached extremely high levels.”

The report also asserts the EU is looking to educate its citizens and raise awareness among European businesses about the risks of working with settlements. It is also looking to advance voluntary guidelines for tour operators to prevent support for settlement business. The EU document added it might look to introduce new restrictions against “known violent settlers and those calling for acts of violence as regards immigration regulations in EU member states.”

It highlights a number of causes behind the escalating situation in Jerusalem, including the kidnap and murder of a Palestinian teenager in the eastern part of the city by Jewish extremists. The killing happened in early July, days before Israel launched a military operation in Gaza, which left over 2,200 Palestinians dead. The EU report also cited incidents involving Palestinians targeting Jews in fatal attacks.

“These developments are increasingly threatening the viability of the two-state solution and, in turn, risk precipitating further levels of polarization and violence.” In a bleak warning, the report continues: “2014 has been distinguished by a number of specific, disturbing and often violent developments” – noting a cycle of stone-throwing, terror attacks and heavy-handed tactics by Israeli police, which, if the root causes were not addressed, were likely to lead to “further escalation and extreme polarization.”

The report also blamed continuing forced evictions of Palestinians from their homes and house demolitions by Israeli security forces for escalating the situation as well as tensions concerning the Temple Mount complex.

Israel demolishes EU-funded West Bank shelter for Palestinians while expanding settlements http://t.co/eQIF6O3Sedpic.twitter.com/dwADKXjbMu — RT (@RT_com) March 12, 2015

“These incidents have occurred against the background of the systematic increase in settlement activity, tensions over the Haram al-Sharif (Temple Mount) and rising levels of tensions and acts of violence on both sides.” Placing part of the blame on Israel’s “unabated” policy of continued settlement construction, it adds: “The expansion of settlements has continued, including in highly sensitive areas … and [has] been followed in force by waves of demolitions and evictions.”

Israel slammed the report saying, “This is so extremely one-sided a report that it distorts reality beyond comprehension,” an Israeli government spokesman said, speaking to the Guardian.