A source with the European Union said on Tuesday that if negotiation between Israelis and Palestinians do not yield an agreement, the EU's ties with both the Palestinian Authority and Israel may suffer.

According to the source, if the peace talks fail, the EU might discontinue its annual donations to the Palestinian Authority and expan its ban of Israeli products manufactured in the West Bank.

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The issue of marking products manufactured in Israeli settlement s has spread across Europe, as 14 EU states, including Britain and France, have noted they would be willing to mark products of Israeli settlements. Until recently, only two countries were in favor of boycotting settlements products.

The source told Israeli reporters in Brussels that over the past years, the EU has donated some €300 million a year to the PA in the purpose of promoting the establishment of a Palestinian state. If the current round of talks does not lead to the establishment of a Palestinian state, the source noted, the EU's financial aid will be called into question.

The source added that the union was considering cutting the funding earlier this year but decided to delay the decision when peace talks began, awaiting diplomatic resolution.

If the EU 's financial aid to the PA is cut, it would not only affect the Palestinian Authority, but also Israel, which may be faced with a weakening of underfunded PA security forces.

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