Palestinian PM Salam Fayyad
Palestinian Prime Minister Salam Fayyad visits a school in the West Bank village of Dahiat Al-BarId on the outskirts of Jerusalem, Tuesday, Nov. 2, 2010. Photo by AP
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About 20 Israeli suppliers will help build the first modern Palestinian city in the West Bank but only after promising they will not use products or services from Israeli settlements, the project's developer said Tuesday.

The announcement angered Israeli residents of the West Bank, who accused the suppliers of caving in to an international boycott of settlement goods and businesses.

The West Bank city of Rawabi, going up 20 miles (30 kilometers) north of Jerusalem, is a key part of Palestinian Prime Minister Salam Fayyad's plans to lay the groundwork for a future Palestinian state, regardless of progress in peace talks.

The participation of Israeli companies in its construction is both an ironic twist on the heavy use of Palestinian laborers in building settlements in the West Bank, and a powerful reminder of how much the 43 years of Israeli occupation have made the Palestinian economy reliant on Israel.

Project developer Bashar Masri told The Associated Press that he tries to use Palestinian suppliers whenever possible. But when necessary, he turns to Israeli firms on condition that products and services from any territories Israel captured in the 1967 Six-Day War - the West Bank, East Jerusalem and the Golan Heights - are not used.

"Settlements are diabolical. They steal Palestinian land and are an obstacle to an independent Palestinian state, and it's time for us to put an end to that harm," Masri said.

He refused to identify any of the Israeli companies, but said they were suppliers of building and construction materials. Their contracts with the Rawabi project were first reported Tuesday by Israel's Army Radio.

 Settler leader Dani Dayan fumed that Israeli companies agreed to the Palestinian conditions. "It's a capitulation to the boycott," Dayan said.

Palestinian activists and their supporters have launched a campaign to persuade investors to divest Israeli holdings and boycott Israeli companies over the occupation. The economic impact has been negligible, but for Israel, the negative publicity has been unwelcome.

Israel accuses boycott advocates of trying to delegitimize the Jewish state and argues that many foreign companies with ties to authoritarian regimes are not similarly targeted.

Fayyad has publicly advocated a boycott of settlement goods in the West Bank, and earlier this year, his government passed a law imposing heavy penalties and jail time on Palestinians who work in settlements.

But they haven't been able to find alternative sources of employment for the estimated 21,000 Palestinians who work in settlements in construction, agriculture or industry, and the law isn't being enforced.

 Some 300,000 Israelis live in more than 120 settlements across the West Bank - almost a threefold increase since the two sides launched their first round of peace talks 17 years ago. An additional 180,000 live in East Jerusalem, the section of the holy city claimed by the Palestinians as a future capital. Israel captured both areas in the Six-Day War.

Also Tuesday, the Fatah Party of Palestinian President Mahmoud Abbas suspended the party membership of Mohammed Dahlan, a former Gaza strongman who is being investigated for trying to form an anti-Abbas bloc.

Dahlan lost much of his standing when the Islamic Hamas routed his forces and took over Gaza in 2007. He has also been dogged by corruption allegations.

Last month, he criticized Abbas in meetings with activists. Soon after, the Palestinian Authority took away his bodyguards.

The official Palestinian news agency Wafa reported Tuesday that Fatah's central committee suspended Dahlan's membership until the investigation is completed.

Dahlan is in Egypt and could not immediately be reached for comment.