The Times of Israel reports that the restrictions stem from directives issued by the European Commission in February and affect chicken and milk products from East Jerusalem, the Golan Heights and the West Bank.

"In keeping with previous decisions, the EU no longer recognized the authority of the veterinary inspections services of Israel to approve the export of poultry and (dairy products), the origin of which are in settlements," a European official told AFP.

The official said that during discussions over implementation of the directives, the "Israelis were asked to put in place a system of distinguishing between the origins of dairy products and poultry."

"If that is put in place that won’t affect poultry and dairy products exported from Israel," the official said, noting the new directives would be effective from 1 September.

An Israeli official involved in the affair told AFP that the agriculture ministry had recently issued directives to poultry and dairy manufacturers to "prepare for the EU decision and separate manufacturing lines, to enable the continued export to the Europe" without including products from settlements.

The official said that Israeli export of products from settlements to Europe was not significant and catered mainly for Jews who observe religious dietary laws and eat kosher food.

Haaretz newspaper on Sunday cited officials in the foreign and agricultural ministries as saying the move would have minimal economic effect as the produce affected would now be channeled towards the local Israeli market.

Another Israeli official slammed the move as a European way to bypass problematic legislation that would single out the Jewish state.

"The EU has for a long time tried to find ways to mark settlement produce, or even prevent its import to Europe, but failed to accomplish such regulation since it’s legally problematic, and also involves breaching trade agreements," the official told AFP.

The EU, the official added, doesn’t want to impose any universal regulations on products from "disputed areas" such as Cyprus, Western Sahara or Kosovo.

So instead it used the European Commission, which is a bureaucratic body, to enforce a political stance against Israel, he said.

Israel’s settlement building is widely viewed internationally as a key obstacle to a peace deal with the Palestinians.

Nine months of US-backed peace talks collapsed in April as Palestinian leader Mahmoud Abbas sought Palestinian membership in 15 UN conventions and reconciled with Hamas, while Israel made a surprise announcement of plans for 700 new settlements and refused to free a last batch of Palestinian prisoners which included Israeli-Arab citizens.