The food and soap manufacturing multinational Unilever has announced that it will divest from an Israeli factory in a Jewish settlement illegally built on land confiscated from Palestinians.

Unilever, which makes household staples such as Sunsilk shampoo, Surf washing powder and Vaseline, said it would sell its 51% stake in the Beigel & Beigel factory in the West Bank settlement of Ariel.

The UK and Dutch-owned multinational has followed Harrods department store - which cleared its shelves of Beigel & Beigel products, such as pretzels, in August - and a campaign by Britain to crack down on Israeli settlement businesses that are allegedly dodging EU import taxes.

Unilever's announcement also came ahead of a report on its investment in the occupied territories by United Civilians for Peace, a Dutch human rights group.

UCP said the decision of Unilever, which defied the international boycott against South Africa during the apartheid era, showed that the firm was "serious" about international law and social responsibility.

But Unilever Israel, which bought half of Beigel & Beigel in 2001, said the move was strategic, not ethical.

"This decision has been taken with reluctance after a long period of analysis and review," it said.

"Following the divestment in recent years of a number of non-core businesses ... the decision has been reached to divest of its interests in the bakery business and will therefore seek to find a buyer for Unilever's share in the Beigel & Beigel partnership," the company said in a statement.

Ariel is one of three large Israeli settlement blocs that penetrate and separate northern and southern parts of the West Bank. It is surrounded by a network of roads that Palestinians are forbidden to use without special permission.

The settlement is built on land that Israel conquered in the 1967 Six Day war. According to UCP, the land for the Beigel & Beigel factory, in Ariel's Barkan industrial estate, was confiscated from the surrounding Palestinian villages in 1981 by a Israeli military order.

"International law prohibits the confiscation of occupied land not for military purposes," the UCP report says.

It also claims that Unilever is in effect supporting Ariel because it pays taxes to the Shomron regional council, which provides services such as rubbish disposal to Barkan. In return, Unilever receives, via Beigel & Beigel, some of the "generous" subsidies that Israel pays companies to produce in settlements.

Companies that operate in settlements also benefit from employing cheap Palestinian labour, the report says.

At Beigel & Beigel, 45% of the 140 workers are Palestinians from the surrounding villages whose land was confiscated for the construction. Most of them work on the assembly line operating machines and contrary to Unilever's own labour standards, they are not paid the Israeli minimum wage, the report claims.

Many workers are paid to work 46.5 hours a week but they often work 50 hours with no compensation. One worker, who must pass through a checkpoint gate to go home after work, told UCP that he is often unable to return to his village.