The European Union’s top court has ruled that EU countries must identify products made in Israeli settlements on their labels, in a decision welcomed by rights groups but likely to spark anger in Israel.

The European court of justice said: “Foodstuffs originating in the territories occupied by the state of Israel must bear the indication of their territory of origin.”

The Luxembourg-based court said the labelling of products from Israeli settlements must provide an “indication of that provenance” so consumers could make “informed choices” when they shopped.

The EU has consistently spoken out against Israeli settlement expansion, saying it undermines the hopes for a two-state solution by gobbling up lands claimed by the Palestinians. Israel says the labelling is unfair and discriminatory and that other countries involved in disputes over land are not treated the same way.

The EU wants any produce made in the settlements to be easily identifiable to shoppers and insists they should not carry the generic “Made in Israel” tag.

Israel captured the West Bank and East Jerusalem in the 1967 Middle East war and began settling both areas shortly afterwards. The Palestinians claim both areas as parts of a future state, a position that has global support.

The international community opposes settlement construction and many countries consider them illegal. Their continued growth is seen to undermine the establishment of an independent Palestine alongside Israel. Today, nearly 700,000 Israelis – almost 10% of the country’s Jewish population– live in the two areas.

The ECJ underlined that settlements “give concrete expression to a policy of population transfer conducted by that state outside its territory, in violation of the rules of general international humanitarian law”.

It said any failure to identify the point of origin of produce meant that “consumers have no way of knowing, in the absence of any information capable of enlightening them in that respect, that a foodstuff comes from a locality or a set of localities constituting a settlement established in one of those territories in breach of the rules of international humanitarian law”.

Human Rights Watch welcomed the ruling. Lotte Leicht, the watchdog’s EU director, said it was “an important step toward EU member states upholding their duty not to participate in the fiction that illegal settlements are part of Israel. European consumers are entitled to be confident that the products they purchase are not linked to serious violations of international humanitarian law.”

In Israel, Prof Eugene Kontorovich, the director of international law at the Jerusalem-based Kohelet Policy Forum, said the European court was “approving putting a new kind of yellow star on Jewish-made products”.

“This blatant discrimination makes it more urgent than ever for the Trump administration to defy Brussels by making official what has long been US practice, to allow these products to be labelled ‘Made in Israel’,” said Kontorovich.

It is not entirely clear how the ruling will be enforced. European retailers would normally be expected to add the labelling, but the real origin of the produce is not always easy to identify, experts say.

The case came to court after an Israeli winery based in a settlement near Jerusalem contested France’s application of a previous ECJ court ruling on the labelling. That ruling backed the use of origin-identifying tags but did not make them legally binding.

The winery and Israel’s foreign ministry had no immediate comment on the ruling.