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A confidential EU report accuses Israel of "actively pursuing the illegal annexation" of East Jerusalem, the British newspaper the Guardian reported early Saturday.

The Guardian reported that the EU document accuses Israel of using settlement expansion, the security barrier in the West Bank, Palestinian house demolitions and discriminatory housing policies to gain control over East Jerusalem.

The report, obtained by the Guardian, is dated December 15, 2008. It acknowledges Israel's legitimate security concerns in Jerusalem, but says: "Many of its current illegal actions in and around the city have limited security justifications."

The report goes on to say that Israel has accelerated its plans for East Jerusalem, and is undermining the Palestinian Authority's credibility and weakening support for peace talks. "Israel's actions in and around Jerusalem constitute one of the most acute challenges to Israeli-Palestinian peace-making," says the document, EU Heads of Mission Report on East Jerusalem.

The Guardian reports that the EU is particularly concerned about the Old City, where there were plans to build 35 new housing units in the Muslim quarter, as well as expansion plans for Silwan, just outside the Old City walls.

Israel demolished two Palestinian homes on Monday just before the arrival of U.S. Secretary of State, Hillary Clinton. Eighty-eight more houses are scheduled for demolition, all for lack of permits.

Clinton described the demolitions as "unhelpful," noting that they violated Israel's obligations under the U.S. "road map" for peace.

The EU report goes further, saying the demolitions "illegal under international law, serve no obvious purpose, have severe humanitarian effects, and fuel bitterness and extremism."