Israel could soon find itself in trouble and face the wrath of Brussels: any further attempts to pose obstacles to a two-state solution with occupied Palestine could result in sanctions, Haaretz revealed, citing a 'confidential' EU document.

The classified paper was originally intended for internal circulation among the 28 member states, but word of its existence reached Israel after some of its diplomats in the EU leaked the fact to the Foreign Ministry back home.

Although the Israelis could not secure the full text of the document, some important details have come out, thanks to three EU diplomats and two senior Israeli officials.

Speaking to Haaretz on condition of anonymity, they say the paper outlines a “sticks and carrots” approach (consisting mainly of ‘sticks’) to take effect in the event of the Jewish state’s further attempts to derail efforts at Palestinian autonomy.

According to a European source close to the discussion, Israel’s unabated settlement building in disputed areas is of primary concern here:

“The peace process is in deep freeze, but the situation on the ground is not. There is big frustration in Europe and zero tolerance for settlement activity. This paper is part of the internal brainstorming being done in Brussels these days, about what can be done to keep the two-state solution alive,” the diplomat said.

In April, Israel went ahead and destroyed several EU-funded humanitarian projects in a West Bank settlement zone known as the E1 corridor, despite threats from Brussels and warnings that this was seriously disturbing territorial coherence with the Palestinians, let alone that it was a breach of international law. Netanyahu’s government has targeted areas inside the corridor since 2012. The three destroyed projects joined scores of other EU-funded structures that Israel has dismantled.

READ MORE:Israel destroys aid projects in West Bank to make room for settlements

Back in April, Europe warned that E1 was a “red line”. Now, sources familiar with the leaked EU document say any further construction there would constitute crossing it.

The same goes for the construction of the Givat Hamatos neighborhood and further settlement building in Har Homa in southeastern Jerusalem. Both are located beyond the historic Green Line running through the city. This could put a very serious damper on a two-state solution, the EU believes, as it would make it absolutely impossible for the city to be a capital to both states.

Although the document is in its initial stages and has been called “an uncooked dish” by one EU diplomat, it’s already causing a headache in Tel Aviv. Not least because it was framed by Christian Berger – the director of the European External Action Service (EEAS) for the Middle East, the same person who threatened the Jewish state with sanctions over its continuing settlement building back in July 2013.

Two weeks ago, possibly in order to soften the potential impact, Israel’s Foreign Minister Avigdor Lieberman met the EU’s new high representative for foreign affairs, Federica Mogherini. Her predecessor, Catherine Ashton, and Lieberman reportedly wanted to make sure that any actions taken by Berger would fall in line with the current policies, and not those of Ashton’s.

The leaked document is not the first of such kind inadvertently made public: last month another less threatening paper proposed dialogue between Israel and the EU on the subject of the ‘red line’ running through E1 in Jerusalem. This put Israel on alert, and according to its top foreign officials, the existence of the new document is proof that the EU “had already started planning for [the talks] to fail and to impose sanctions.”

Current policy from Brussels stipulates that any upgrading of ties with Israel hinges on its positive efforts at reaching a two-state solution. But this could change if Israel goes the other way, in which case the EU will start to restrict ties and impose sanctions, the document reportedly reads.