A dramatic new directive published by the European Union bars its 28 members from all cooperation with Israeli entities in the West Bank and East Jerusalem.

The directive, sent out on June 30 and set to take effect on Friday, extends to “all funding, cooperation, and the granting of scholarships, research grants and prizes” to Israeli entities in East Jerusalem and the West Bank, Haaretz reported on Tuesday.

It also requires that any contracts between EU member countries and Israel henceforth include a clause stating that East Jerusalem and the West Bank are not part of the State of Israel.

Sandra de Waele, the deputy EU ambassador to Israel, said the measure was designed to ensure that EU financial support “not benefit [Israeli] entities” beyond the Green Line, because it was the EU’s position that such entities were illegal. She said there had been concern that these entities had indeed been benefiting from EU funds. She stressed that the directive would not affect private businesses.

A senior Israeli official told Haaretz that the ruling was an “earthquake” which unprecedentedly turns “understandings and quiet agreements that the Union does not work beyond the Green Line” into “formal, binding policy.”

The Prime Minister’s Office and the Foreign Ministry were reported to be in “great tension and anxiety” over how to respond to the territorial clause, which is likely to be a stumbling block in Israel-EU relations.

Army Radio reported that the directive would also apply to the Golan Heights, captured by Israel from Syria in 1967, potentially drastically impacting exports to Europe from the Golan.

The new directive, initiated in December by the EU foreign ministers, is “in conformity with the EU’s longstanding position that Israeli settlements are illegal under international law and with the non-recognition by the EU of Israel’s sovereignty over the occupied territories, irrespective of their legal status under domestic Israeli law,” the EU said in a statement.

In an Army Radio interview, Deputy Foreign Minister Zeev Elkin called the decision worrying, and said it would strengthen the Palestinians’ stance — reducing their motivation to compromise with Israel in peace efforts.

Regional Development Minister Silvan Shalom said the directive underlined “how disconnected” Europe has become from the realities of the Middle East and that its policies proved Europe could not play a sensitive, effective role in Israeli-Palestinian diplomacy.

Ayelet Shaked, from the religious-nationalist Jewish Home, said Israel needed to be strong and determined, and “will not take directives from Europe.”

In contrast, Labor’s Nachman Shai blamed misguided “forces in our government” for turning the international community against Israel through their settlement policies. These forces were gradually “costing us our independence,” said Shai. “The world is putting us under siege.”

Jerusalem was urgently trying to ascertain whether the new directive would prove more dramatic on paper than in practice, the Army Radio report said. For example, officials were seeking to determine, would the EU henceforth halt all cooperation with the Hebrew University, for instance, since it employs staff who live beyond the 1967 lines, at the draconian limit of the directive? Or, at the other extreme, would implementation prove near-impossible, and ultimately have little effect on the ground?

The European Union has been reported to be mulling sanctions against Israel’s occupation of the West Bank and East Jerusalem for some time, with new rules for labeling products produced over the Green Line on the table.

The directive, to be in effect until 2020, is designed in part to stave-off a general boycott of Israel and to ensure that Israel’s participation in EU projects is “not put in question,” the EU told Haaretz. Reportedly, the clause is already affecting negotiations over a proposed Israeli-EU youth project.

One Israeli official told Haaretz that “we are not ready to sign on this clause” [acknowledging that areas beyond the Green Line are not part of Israel] in future agreements with the EU, and said that pushing back could cause a “halt to all cooperation in economics, science, culture, sports and academia” with Europe, which “would cause severe damage to Israel.”

Europe has long opposed much of Israel’s policy in the West Bank and East Jerusalem, and in March EU foreign policy chief Catherine Ashton was the latest to call for implementing the labeling of products produced in the settlements for sale in Europe.

A Der Spiegel report from earlier this year estimated that Europe imports some $287 million (NIS 1 billion) worth of goods produced beyond the Green Line each year.

In February, EU Ambassador to Israel Andrew Standley told the Times of Israel that “the EU is opposed to boycotts” but suggested that such directives are “the expression of concern at the political level at the lack of positive movement in the Middle East peace process” and continued Israeli settlement construction.

Raphael Ahren contributed to this report.