Israel would be required to label products that are made in West Bank settlements and exported to Europe, according to guidelines being prepared by the European Union.
The move is the latest sign of international discontent with Israeli construction of settlements on occupied lands claimed by the Palestinians, as well as frustration over the bleak state of Mideast peace efforts.
It also comes as a grassroots movement promoting boycotts, divestment and sanctions against Israel appears to be gaining steam.
Israeli officials reject the European labeling plan, saying it would amount to a type of boycott and help discourage Palestinian President Mahmoud Abbas from returning to negotiations.
"Why should he talk? He can get by without talking. He can get by with an international community that blames Israel for not having talks," Prime Minister Benjamin Netanyahu told the Herzliya Conference, an annual gathering of the country's political and security elite.
An EU official said Tuesday the 28-nation bloc's foreign policy chief, Federica Mogherini, told European foreign ministers May 18 that work is underway and that a set of guidelines will be "finalized in the near future."
The Palestinians claim the West Bank and east Jerusalem - territories captured by Israel in the 1967 Mideast war - as parts of a future independent state. The international community opposes Israeli settlements in the two areas, saying they undermine the goal of dividing the land between two countries. More than 550,000 Jewish settlers live in the West Bank.
EU opposition to the settlements is not new. A free trade agreement with Israel already excludes settlement goods, even if they say they were made in Israel. Likewise, Israel is barred from spending money it receives under a landmark technology-sharing pact in the West Bank or east Jerusalem. Several European countries have approved voluntary labeling guidelines for settlement products.
The new guidelines would take things further by requiring Israeli exporters to explicitly label products as being made in the settlements - a potential stigma that could deter consumers from buying them. The EU began work on labeling guidelines in 2012, but appears to have decided to revive that effort following the formation of Israel's new hard-line government.
The EU official said it would likely be months before the guidelines are complete. A second official said much would depend on the policies of the new government. If peace talks with the Palestinians are restarted, the effort could once again be shelved. But if talks remain frozen and Israel steps up settlement construction, the EU will move forward, he said. Both officials spoke on condition of anonymity because they were not authorized to discuss internal EU deliberations with the media.
For now, the odds of Israel and the Palestinians relaunching peace talks appear extremely slim.
Netanyahu's new government is dominated by pro-settlement hard-liners who oppose the creation of a Palestinian state. Netanyahu himself spoke out against Palestinian independence in the recent election campaign. Although he has backpedaled and called for a resumption of peace talks, the Palestinians and Israel's Western allies are skeptical in the absence of a firm proposal from him.
Instead, the Palestinians have been moving forward with a campaign against Israel in international organizations like the United Nations and the International Criminal Court. Two weeks ago, Israel fended off a Palestinian attempt to expel Israel from FIFA, the global soccer federation.
At the same time, the grassroots pro-Palestinian boycott movement, known by its initials BDS, appears to be gaining strength. Last week, Britain's national student union endorsed the BDS movement, while the chief executive of French telecom giant Orange said he wanted to cut business ties with Israel to help gain favor with the Arab world.
Orange CEO Stephane Richard subsequently backtracked, telling France's BFM television station Monday that his decision was only a business move and he is "radically opposed to all forms of discrimination."
The station said Richard planned to go to Israel soon to speak to the nation's leaders. But the uproar in Israel has not subsided.
Politicians across Israel's political spectrum have blasted the BDS movement, and Justice Minister Ayelet Shaked said Thursday she had ordered experts to plan legal steps against it. "In this arena, we will move from the defense to the offense," she said.
In his speech Tuesday, Netanyahu said the global pressure on Israel was undermining hopes of resuming talks.
"The Palestinians have a nifty trick up their sleeve, they refuse to negotiate and then get international pressure, sanctions, and boycotts on Israel for there not being negotiations," he said. "It's the perfect Catch-22."
An EU labeling effort would deliver an especially tough diplomatic blow. In contrast to the BDS movement, whose leaders often voice hatred of Israel, Western European countries are among Israel's closest allies.
Europe also is Israel's largest trade market, importing about $14.7 billion in goods last year, according to EU figures. Products from the settlements, including wines, honey, cosmetics and agricultural produce, make up just 1.5 percent of that total, according to Israel's Finance Ministry.
But while the economic impact of a labeling campaign might be minimal, it would be a symbolic setback to Israel.
"If Europe begins labeling settlement products, then this will mean that they have put their political position into effect in the sense that there will be a real and true boycott of settlement goods," said Mohammed Shtayyeh, the Palestinian Cabinet minister in charge of economic development.
Foreign Ministry spokesman Emmanuel Nahshon said Israel fears that consumers will not differentiate between settlement products and Israeli products. "It will be a de facto boycott against Israel," he said.
Nahshon said Israel is in "close contact and dialogue" with the EU on the matter. "We have been conveying our positions, and we hope they will be accepted by the EU," he said.
Israel has traditionally used its closest allies in Europe, such as Britain and Germany, to blunt EU decisions, which require a consensus.
Regardless of what the EU's executive arm decides on labeling, its member states remain divided about what to do, said Pierre Vimont, a former top EU official who is a senior associate at Carnegie Europe, a Brussels-based think tank.
"Preparation has been going now on for two years, and we are more than ready to go ahead," he said in a recent interview. "But we have been avoiding this difficult moment because we know member states are split, and it could be a very ugly discussion among us. At the end of the day, this could be the tricky issue."