The Palestinian presence in the largest part of the occupied West Bank – has been, "continuously undermined" by Israel in ways that are "closing the window" on a two-state solution, according to an internal EU report seen by The Independent.

The report, approved by top Brussels officials, argues that EU support, including for a wide range of building projects, is now needed to protect the rights of "ever more isolated" Palestinians in "Area C", a sector that includes all 124 Jewish settlements – illegal in international law – and which is under direct Israeli control. It comprises 62 per cent of the West Bank, including the "most fertile and resource rich land".

With the number of Jewish settlers now at more than double the shrinking Palestinian population in the largely rural area, the report warns bluntly that, "if current trends are not stopped and reversed, the establishment of a viable Palestinian state within pre-1967 borders seem more remote than ever".

The 16-page document is the EU's starkest critique yet of how a combination of house and farm building demolitions; a prohibitive planning regime; relentless settlement expansion; the military's separation barrier; obstacles to free movement; and denial of access to vital natural resources, including land and water, is eroding Palestinian tenure of the large tract of the West Bank on which hopes of a contiguous Palestinian state depend.

International brokers are trying to persuade both sides to reach a peaceful settlement through talks, which had stalled over the building of Israeli settlements and the Palestinians' recent declaration of statehood at the UN.

The report points out how dramatically the settler population – now at 310,000 – of Area C has increased at the expense of Palestinian numbers – estimated at around 150,000. In 1967, there were between 200,000 and 320,000 Palestinians in just the agriculture-rich Jordan Valley part of the zone.

Area C is one of three zones allocated by the 1993 Oslo agreement. Area A includes major Palestinian cities, and is under the control of the Palestinian Authority. Area B is under shared Israeli-Palestinian control.

Although Area C is the least populous, the report says "the window for a two-state solution is rapidly closing with the continued expansion of Israeli settlements and access restrictions for Palestinians in Area C [which] compromises crucial natural resources and land for the future demographic and economic growth of a viable Palestinian state".

It says the EU needs "at a political" level to persuade Israel to redesignate Area C, but in the meantime it should "support Palestinian presence in, and development of the area". The report says the destruction of homes, public buildings and workplaces result in "forced transfer of the native population" and that construction is effectively prohibited in 70 per cent of the land – and then in zones largely allocated to settlements of the Israeli military.

In practice, it says Palestinian construction is permitted in just 1 per cent of Area C, "most of which is already built up". The EU report's short- and medium-term recommendations include calling on Israel to halt demolitions of houses and structures built without permits – of which there have been 4,800 since 2000. But there is also a call for the EU to support a building programme that includes schools, clinics, water and other infrastructure projects.

The EU should also be more vocal in raising objections to "involuntary population movements, displacements, evictions and internal migration".