A narrow country road outside Jerusalem has turned into a new battleground between Israel and the European Union, deepening a dispute between the allies over Israeli settlement construction in the West Bank.

The EU is financing the paving of the dirt road by Palestinians as part of a broader effort to help them develop the local economy on the way to eventual independence. Israel, however, says the roadwork is illegal because it was done without Israeli permits and has ordered it to stop.

The dispute goes far beyond the 4-kilometer (2.5-mile) road, which Palestinians say is to help farmers in the area reach their land. At issue is the future of portions of the West Bank known as "Area C," the 60 percent of the territory that remained under full Israeli control as part of interim peace accords two decades ago. Its ultimate fate has been a major contention point in peace talks between Israel and the Palestinians.

The Palestinians claim all of the West Bank, captured by Israel in the 1967 Mideast war, as the heartland of a future independent state.

Israel seeks to keep large chunks of the area, which is home to 300,000 of the West Bank's 2.4 million Palestinians as well as the 370,000 Israeli settlers in the territory. Israeli Education Minister Naftali Bennett, leader of the hard-line "Jewish Home" party, has even said the area should be annexed.

According to interim peace accords, any construction in Area C needs permission from Israel. Israel rarely grants approval for Palestinian building.

The international community has urged Israel to freeze settlement activity and lift restrictions on Palestinian development in Area C. The Palestinians, backed by organizations like the World Bank and the EU, say they cannot establish a viable state without developing this land.

In the maze of lines created by the Oslo accords in the West Bank, Area C divides up the territory under Palestinian control into isolated enclaves, making expansion of Palestinian communities difficult. Under the accords, that division was supposed to be temporary, with much of Area C to be transferred to Palestinian control, but with the breakdown of the peace process that never happened.

Last week, the EU Foreign Affairs Council said a change of policy by Israel in Palestinian areas, and particularly Area C, "will significantly increase economic opportunities, empower Palestinian institutions and enhance stability and security for both Israelis and Palestinians."

The EU runs dozens of projects in Area C. The Israeli government views these efforts with great suspicion and often demolishes projects it says are illegal.

Between January and May 2015, for instance, 41 EU-funded structures that cost some 236,000 euros ($255,000) to build were torn down by Israel, the EU's commissioner for aid and crisis manager, Christos Stylianides, recently told the European Parliament.

Those are the most recent figures available from the EU. But the dispute seems to be worsening. In a meeting with foreign journalists earlier this month, Israeli Prime Minister Benjamin Netanyahu called the EU-funded structures "illegal."

"They're building without authorization against the accepted rules and there's a clear attempt to create political realities there," Netanyahu said.

The spat comes against the backdrop of a larger dispute over Israeli settlement construction.

The Palestinians say Israel is expanding settlements in order to create its own political reality — entrenching its control over the West Bank. The international community considers the settlements illegal or illegitimate, saying they undermine the goal of establishing a Palestinian state.

Last year, the EU passed a bill requiring Israeli settlement products to have special labels if they are sold in Europe. Earlier this month, it said all agreements with Israel must "unequivocally and explicitly" show that they cannot apply to occupied territories, further underscoring its opposition to the settlements.

The new EU-funded road is meant to help Palestinian farmers gain better access to their land, Palestinians say. The road runs near the Palestinian town of Tukou, about 8 miles southeast of Jerusalem.

The Palestinians say that since the road already existed, the project is not considered new construction and there was no need to ask Israel for a building permit, said an official from the Union of Agricultural Works Committee, the Palestinian nonprofit that has been carrying out the work. He spoke anonymously because he was not authorized to discuss the issue with the media.

After work began last summer, Regavim, an Israeli advocacy group with ties to the Jewish settler movement, filed a challenge to the Supreme Court and Cogat, the Israeli military body responsible for civilian affairs in the West Bank.

Ari Briggs, a Regavim official, said his group objects to the construction on security grounds and fears that the Palestinians will expand their presence into settler areas. He accused the EU of "defying" Israeli law and establishing facts on the ground. "This is something that's illegal," he said.

In December, Cogat ordered construction to stop.

The Palestinian union official said 90 percent of the road was completed before the work was halted. He said the union is complying with the order, but is planning a legal challenge.

Ralph Tarraf, the EU representative to the Palestinian territories, said the 28-country bloc will carry on its mission in Area C.

"The EU provides humanitarian assistance to communities in need in Area C in accordance with the humanitarian imperative. And second, the EU also works with the Palestinian Authority to develop Area C and support the Palestinian presence there," he said last week at a ceremony in the in the West Bank city of Ramallah. Tarraf declined an interview request.

With the battle showing no signs of abating, Netanyahu suggested that Israel and the EU "reset" their relationship on the issue.

He told reporters that he recently met with the EU's foreign policy chief, Federica Mogherini, in Paris, and told her the sides need to get past their differences.

"I hope we can do this on better terms," he said he told her. "We have to figure out a way to resolve this and set things on the right course."