European diplomats and senior officials in Jerusalem said the issue, which was due to be pushed through at the EU's Foreign Affairs Council this week, was put off to the end of June.
A year ago, the foreign ministers of the 27 EU member states decided to fully enforce EU legislation regarding products originating from the settlements. Such products would be labeled throughout the EU.
For several months, no EU member moved to carry out the decision. But in February, foreign policy chief Catherine Ashton sent a letter to her colleagues asking them to enforce EU legislation on the issue.
In mid-April, foreign ministers of 13 member states including France, Britain, Spain and the Netherlands replied to Ashton, expressing support for clearly labeling products imported from the settlements. But the ministers asked Ashton to draft clear directives and submit them to the Foreign Affairs Council for approval.
In the past month, EU officials, led by the organization's Middle East representative Christian Berger, have discussed the issue. The officials considered submitting regulations to the Foreign Affairs Council at its meeting this week.
A senior official in Jerusalem said Israel had asked the U.S. administration to help stop or at least delay the EU decision to label products. He said Israel even asked for Secretary of State John Kerry's intervention.
Kerry and other senior U.S. officials asked Ashton and her staff, as well as several major EU states, to put off full enforcement.
According to two European diplomats, the Americans said enforcing the decision at this time would harm Kerry's efforts to revive negotiations between Israel and the Palestinians.
Kerry started talks with Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas on March 23 to prepare the ground for resuming peace negotiations. During this time, Netanyahu promised to limit construction in the settlements, while Abbas promised to suspend unilateral moves at the United Nations toward Palestinian statehood.
Kerry has asked the sides for an extension of two to three weeks, and both Netanyahu and Abbas agreed.
The Americans told the Europeans that Kerry wants to present a plan for resuming the Israel-Palestinians negotiations by mid-June. The Americans therefore asked the EU to put off the labeling issue to June.
"The EU decided to give Kerry the time he asked for and see whether the negotiations are resumed," a European diplomat said.
The EU is frustrated by the standstill in the peace process, and its member states, even those friendly to Israel, want to do something about the settlements, the sources said.
For example, Czech Foreign Minister Karel Schwarzenberg said during his visit to Israel around two weeks ago that it was very difficult for Israel's friends in Europe to defend its policy on the Palestinians.
In an interview with the website Times of Israel, Schwarzenberg said the settlement building plans were "obnoxious" and that he was in favor of labeling settlement products in European stores.
An Israeli official said the delay in the EU's decision was conditional on progress in the talks with the Palestinians. Unless a breakthrough is achieved in the talks next month, the EU will instruct all 27 member states to label products from West Bank settlements, he said.
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