The European Union's ambassador to Israel says a burgeoning movement to sanction Israel over its construction of West Bank settlements will gain steam if the current round of Mideast peace talks fails.

A small but growing number of European businesses and pension funds have begun to drop investments or limit trade with Israeli firms involved in the West Bank settlements.

Ambassador Lars Faaborg-Andersen told reporters Wednesday that the EU wants to expand its cooperation with Israel. But if warned that if Israel keeps building settlements and peace talks collapse, "will transpire is a situation in which Israel will find itself increasingly isolated" on the economic front.

Faaborg-Andersen said the EU considers Israeli settlements built on lands claimed by the Palestinians as illegal and obstacles to peace.