The Israeli military is making rare use of an emergency regulation enacted by the British Mandate in 1945 to order the temporary banishment of a Palestinian activist from his home city of Jerusalem.

Adnan Gheith, 35, faces expulsion for four months from the city because of his part in protests at mounting encroachment by Jewish settler groups in the politically ultra-sensitive Silwan neighbourhood of inner-city Arab East Jerusalem.

Silwan is the primary flashpoint in the struggle between the settlers and Palestinians for control of key sectors of East Jerusalem. The moderate Palestinian leadership, under President Mahmoud Abbas, wants this section of the city, which was unilaterally annexed by Israel after the 1967 Six Day War, to become the capital of a future Palestinian state.

Use of the 65-year-old order follows a wave of protests against government-backed plans to demolish at least 22 Palestinian homes to make way for an Israeli-sponsored, biblically inspired tourism park.

The move comes as a confidential new report by senior diplomats from EU states warns that current attempts to "integrate" East Jerusalem into Israel "endanger the chance of a sustainable peace on the basis of two states". All the EU members, including Britain, regard the annexation of East Jerusalem as illegal.

The Israeli military said that it had been "presented with defence and intelligence information that ties [Mr Gheith] to activities related to public order within the city limits of Jerusalem, such as disturbances in the neighbourhood of Silwan".

But Mr Gheith's lawyer, Rami Othman, says the military would not have used the 1945 order – allowing temporary expulsion of residents without charge – if it had enough evidence to indict his client. Mr Gheith has been arrested seven times in recent months but has always been released without charge. A long-time activist in Mr Abbas's Fatah faction, Mr Gheith says he has no intention of obeying the order voluntarily: "If they implement this law against me, hundreds will be expelled."

The clashes in Silwan between armed security forces and stone-throwing demonstrators escalated sharply in September when a security guard employed by the settler organisation El'ad shot dead Samer Sarhan, one of Mr Gheith's fellow members on the local residents' committee. Mr Gheith says that after one of his arrests – by masked Israeli security forces who came to his home at 3am – he was threatened by one of his interrogators that "what happened to Samer Sarhan will happen to you".

The Israeli human rights group B'Tselem says that more than 80 minors, some as young as eight, have been arrested on suspicion of stone-throwing in the past year, often being taken from their homes at night and interrogated without their parents present; some have complained of violent treatment.

The immediate trigger for the unrest in Silwan has been the Jerusalem municipality's government-backed plan to turn a large part of its Palestinian-inhabited subdistrict of al-Bustan into the "King's Garden", a tourist park that would connect to the "City of David" archaeological site. While confirming in March that 22 Palestinian houses would be demolished, Mayor Nir Barkat did not rule out that others among the 90 in the area served with demolition orders might also go.

The report by the EU Consuls General says an estimated 5,000 Jewish settlers in the Historic Basin, which includes Silwan, are "creating facts on the ground by attempting to prevent a division of the city" needed for a final peace deal. It says that "a swath of smaller settlements, public parks, archaeological sites and tourist complexes" are part of a "strategic settlement push" promoted by settler organisations but "facilitated by the government of Israel and the Jerusalem municipality".

At the café he owns in the heart of Silwan, Mr Gheith, a father of four children under 13, said that opposing settlers acting "under protection of the soldiers" is "in the eyes of the government an act of terrorism. The Israeli occupation doesn't like to listen to anyone who rejects injustice." He added that Israel was determined to use the settlers in East Jerusalem "in Judaising [East] Jerusalem and expelling people, turning Jerusalem into a Jewish city by creating facts on the ground".

Ironically, the order invoked by the Israeli military was part of a package of emergency defence regulations codified by the British military at the end of the Second World War to combat growing Jewish unrest.