Relations between the European Union and Israel took a dive on Wednesday after Israel derided a decision by the 28-nation bloc to label products made in Jewish settlements in the West Bank.

The Israeli Foreign Ministry said the EU has taken an "exceptional and discriminatory step" for "political reasons," while Prime Minister Benjamin Netanyahu said the EU should be "ashamed," and accused the bloc of punishing "the side that is being attacked by terrorism." He said "this will not advance peace; it will certainly not advance truth and justice."

The EU move, which came after months of procrastinating, underscores the bloc's unhappiness over Israel's continued expansion of settlements on territory that Palestinians seek for their future state.

The 28-member union is now seeking to differentiate between its relations with Israel and with the settlements, fearing that a continued status quo would never push the Israeli government into changing its settlement policies.

Once the labelling is implemented, European consumers will be able to read on the label of most products if a piece of merchandise or goods -- mostly fruit and vegetables -- was produced in the Jewish settlements. Israel fears the labels will be a political stigma.

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EU Commission Vice-President Valdis Dombrovskis insisted the measure was "a technical issue, not a political stance."

He said the guidelines had to be taken after three member states -- Britain, Belgium and Denmark -- imposed special labeling on their own, forcing the EU to streamline measures throughout the 28 nations.

"The EU does not support in any form a boycott or sanctions against Israel," he said, insisting that Israeli products from within the internationally recognized borders still benefit from EU preferential tariff treatment.

Israel insists the step was inspired by an international boycott movement and noted that it comes at a time when the country is confronting a "wave of terrorism" amid stepped-up Palestinian attacks.

Palestinian President Mahmoud Abbas praised the EU decision.

"I highly appreciate what the EU countries did on the products of the Israeli colonial settlements," he said in Saudi Arabia, where he was attending a summit of Arab and Latin American countries. He urged other participants to also welcome the EU move.

The Israeli Foreign Ministry said it's "puzzling and even irritating that the EU chooses to apply a double standard concerning Israel," while other territorial disputes around the world are treated differently.

It added that the step "raises questions" about the EU's role in the region and could have implications on Israel's relations with Europe. It added that the measure will harden Palestinian positions and make it more difficult to resume peace talks.

After the decision was announced, the ministry summoned the EU ambassador to Israel.

Israel's deputy foreign minister later said the government will suspend a series of ongoing meetings with the European Union to protest the decision. Tzipi Hotovely said Israel was sending a "very strong message" of displeasure.

"We say you can't be involved in what is going on in the Middle East while you are taking such an extreme step of labeling products... boycotting us," she told Channel 2 TV.

Ministry spokesman Emmanuel Nachshon said Israel would suspend a series of regular dialogues on political issues in the Middle East, human rights and international organizations.He said the suspension would likely be temporary.

On the eve of the decision, Israeli Cabinet minister Yuval Steinitz said the measure amounts to "disguised anti-Semitism."

The labelling will primarily cover fruit and vegetables. It should affect less than 1 percent of all trade between the EU and Israel, which stands at some 30 billion euro ($32 billion), including 13 billion euro ($14 billion) Israeli exports into the bloc.

EU officials have said that in Britain, where the labelling is already in place, it has had no negative economic effect. For over a decade now, the EU has excluded products from settlements from trade preferences.

Israel, however, sees it as a political stigma that would push consumers away.

The Palestinians claim the West Bank and east Jerusalem -- territories captured by Israel in the 1967 Mideast war -- as parts of a future independent state.

The international community opposes Israeli settlements in the two areas, saying they undermine the goal of dividing the land. More than 550,000 Jewish settlers live on occupied land.