Israel has reacted strongly to the recommendation in an EU draft report that East Jerusalem should be recognized as the capital of a future Palestinian state.

The draft document is due to be discussed by EU foreign ministers next week. It is critical of Israeli policies towards the Palestinians, warning that peace process negotiations should resume urgently, to break the current stalemate.

According to the report, a future Palestinian state should include the West Bank and Gaza, with East Jerusalem as the capital. The EU and most of the international community do not recognize Israel’s annexation of East Jerusalem as legitimate.

Israel reacted on Wednesday, criticizing Sweden, which currently holds the EU presidency, and justifying its own record on peace negotiations with the Palestinians.

"The move led by Sweden damages the ability of the European Union to take a role and be a significant factor in negotiations between Israel and the Palestinians," the Israeli Foreign Ministry stated.

"After the important steps taken by the government of Israel to enable the resumption of negotiations with the Palestinians, the European Union must now exert pressure on the Palestinians to return to the negotiating table. Steps like those being led by Sweden only contribute to the opposite effect," the Ministry commented.

Palestinian President, Mahmoud Abbas, has refused for almost one year to resume negotiations with Israel unless they halt all settlement construction. Israel has so far ignored this demand, and has continued to expand settlements, and to build inside East Jerusalem itself.

The diplomatic row has occurred at a time when Palestinian leaders are considering a unilateral declaration of independence or, as an alternative, seeking a UN resolution that would affirm statehood over Gaza, the West Bank and East Jerusalem.