Officials seek compromise on clause requiring settlement boycott but hardliners say Israel should not give in

The Israeli government is split over the prospect of being excluded from a prestigious and lucrative European scientific research programme unless it accedes to a clause effectively endorsing a boycott of its cherished settlement enterprise.

The issue has the potential to further isolate Israel internationally, and particularly from Europe, with which relations have grown increasingly strained over continued settlement expansion.

After two emergency cabinet meetings to discuss the issue on Monday, an Israeli team has been dispatched to Brussels in an attempt to negotiate a last-minute compromise with the EU.

Its aim is to allow Israel to sign up to the Horizon 2020 project without prohibiting the involvement of any bodies or institutions with connections to settlements in the West Bank and East Jerusalem.

But if no compromise is forthcoming, the prime minister, Binyamin Netanyahu, faces a difficult choice. The foreign minister, Avigdor Lieberman, backed by other hardline rightwingers, is arguing that Israel should not yield to EU "arm-twisting" on principle.

The science and technology minister, Yaakov Peri, supported by the academic establishment, says a refusal to join the programme will be highly damaging to Israeli scientific research and development.

The roots of the row lie in guidelines published by the EU in July, prohibiting the funding by way of grants, scholarships or awards to Israeli institutions which have links to settlements. The move was met with furious condemnation by Netanyahu over "external diktats".

Horizon 2020 is the first serious test of the guidelines. The seven-year pan-European scientific research and development programme, which Israel was invited to join, would have a net financial worth to Israel of around €500m (£420m) as well as delivering valuable co-operation.

Israeli officials submitted a compromise proposal to Brussels which was rejected after two weeks. "We expected them to meet us halfway, but there was no attempt to do so. They just said: 'These are the rules, join or don't join'," said one official. "It looks like we're heading for a crash, but no final decision has been made."

Anger at the EU's stance was exacerbated by its response being delayed until close to the first deadline for applying for Horizon 2020 grants. If Israel does not sign up to the programme by the beginning of December, it fears the lion's share of funding will be allocated to other countries.

Manuel Trajtenberg, the chairman of the parliamentary higher education planning and budgetary committee, said the question was whether signing or not signing was the lesser evil.

"Taking part in the programme means access, a doorway to co-operation with the greatest researchers in Europe, and access to expensive research infrastructure that the state of Israel cannot afford. There is no alternative in the world to co-operation of this extent," he told Israel radio.

Israel should make a final attempt to amend the wording, he said. "And it has to make every effort to sign it. If it doesn't, this will not only hurt the state of Israel's basic interests. If we don't sign, we will be removing ourselves from Europe."