The European Union warned Israel of unspecified consequences Monday if it goes through with plans to build thousands of new settler homes in Jerusalem and the West Bank.

The bloc's 27 foreign ministers said they were "deeply dismayed" by Israeli plans to expand settlements, particularly with regard to the E-1 project, which would separate the West Bank from East Jerusalem, the Palestinians' hoped-for capital, and drive a big wedge between the northern and southern flanks of the territory.

"The E-1 plan, if implemented, would seriously undermine the prospects of a negotiated resolution of the conflict by jeopardizing the possibility of a contiguous and viable Palestinian state and of Jerusalem as the capital of two states," the ministers said in a joint statement. "It could also entail forced transfer of civilian populations."

The EU views any Israeli settlements on territory occupied during the 1967 Six-Day War as a breach of international law.

"The EU will closely monitor the situation and its broader implications and act accordingly," the ministers said.

The ministers also warned the Paletsinians not to take advantage of their upgraded UN status to further undermine confidence between the two sides, and condemned Hamas leader Khaled Meshal's pledge to "free the land of Palestine inch by inch".

"The EU finds inflammatory statements by Hamas leaders thatdeny Israel's right to exist unacceptable," the ministers said.

The new settlement plans have drawn widespread international condemnation, with the U.S. ­also urging Israeli Prime Minister Benjamin Netanyahu to call off the plans.

Europe's political view of the Mideast has changed profoundly since Israel announced plans to build 3,000 new settler homes in the West Bank and East Jerusalem, Swedish Foreign Minister Carl Bildt said earlier.

Bildt, speaking as ministers gathered for Monday's meeting, said the Israeli plans had caused "extreme concern" in Europe.

"What the Israelis did on E-1 has shifted opinions in Europe," Bildt said. "I don't think the Israelis are aware of this."

Some advocacy groups want the EU to prohibit the sale of goods made by Israeli settlers from being labeled as made in Israel. The labeling issue may come up but was not officially on the agenda.

EU options for pressing Israel

The European Union had been expected prior to the meeting to hold off on tough action soon despite international outrage over the decision. Some officials say that options for robust steps against Israel are limited due to a lack of unanimity in the 27-member EU and diplomatic protection of Israel by its cast-iron superpower ally. the United States.

The prospect of punitive EU measures would rise if Israel continues to flout world opinion, but noises from Britain, France and Germany do not point to strong action for now.

Still, several options are open to the EU - one of Israel's biggest trading partners - to pressure the Jewish state into ditching the settlement plan that Palestinians protest would rob them of territory crucial to their bid for a viable state and further dim chances of reviving frozen peace negotiations.

British Foreign Secretary William Hague last week distanced the prospect of sanctions, and instead spoke of negotiations and formulating "incentives and disincentives" for peace talks.

France too discounted sanctions and has lowered expectations of tough measures, saying the onus must be on "persuasion" and reminding Israel of "principles and condemnations".

"There are ideas on the table, but let's see whether the Israelis actually go ahead with construction and what happens in the elections," said a French diplomatic source.

Israel is to hold parliamentary elections in January. Israeli officials said it could be up to two years before any building begins in the designated zone east of Jerusalem.

Britain, France and several other European countries summoned Israeli envoys last week to protest over the plan to build settlements in E-1, and even Israel's staunch European ally Germany voiced criticism.

However, on Thursday during a visit by Israeli Prime Minister Benjamin Netanyahu to Berlin, Germany too appeared to emphasize a hands-off approach to Israeli decision making.

"Israel decides for itself, it is a sovereign state. All we can do as a partner is give our opinion and our evaluation," German Chancellor Angela Merkel said after meeting Netanyahu.

The right-wing Netanyahu has shrugged off world criticism and stressed Israel's right to defend its "vital interests".

Israel's umbilical alliance with the United States and differing views within the EU have militated against concrete international action over expanding settlement in the West Bank.

"European governments individually and collectively express their frustration with policies adopted by the Israeli government .... but so far that frustration has not coalesced into a determination to take action like for example economic sanctions," said Menzies Campbell, a prominent member of the British parliament's Foreign Affairs Committee.

"The reasons for this are complex. A desire not to offend the Americans..., the fact that in some countries at least there is lingering guilt the Holocaust was allowed to take place and also the difficulty of getting a unanimous view on issues of this kind from the 27 members of the EU," he added.

Others see fewer obstacles to strong measures.

Left-wing European lawmaker Daniel Cohn-Bendit said unanimity was not required for some measures.

"They can decide on qualified majority. They don't need unanimity," he said, adding that without a credible threat, Europe would in effect be telling Israel, "Do what you want."

Chris Doyle, who heads Caabu, a think-tank on Arab-British relations, outlined a string of options open to EU countries.

As well as economic sanctions, EU states could cease cooperation on academic research, impose restrictions on goods produced in illegal Israeli settlements and even impose visa restrictions on members of far-right Israeli groups, he said.

European countries could also individually bolster bilateral relations with the Palestinians, a move likely to anger Israel.

"The Israelis will not budge unless they really believe there's intent. They've heard it all before. It's the Europeans jumping up and down. So what?" he said.

"If there is political will to take the necessary action, then a whole load of options become available."

For its part, Israel appears even less likely than before to heed European protests over settlements, given that several European powers either voted yes or abstained in the Nov. 29 UN General Assembly vote on a Palestinian diplomatic upgrade.

The Palestinians won the vote, effectively securing UN backing for their bid for statehood, a move condemned by Israel and the United States as unilateral and hampering peace talks. Israel's new settlements announcement came a day later.