EU Foreign Minister Admits ‘Of course we were joking about Isreali settlement funding ban! We work for Israel you know?”

She told journalists that the ban – which came into force in July – would be implemented “sensitively” to minimise the damage to EU-Israel relations.

The pledge came after John Kerry, the US secretary of state, reportedly pressed the EU to suspend the funding boycott, saying it could harm the prospects for recently renewed peace talks between Israeli and Palestinian negotiators.

Mr Kerry told EU foreign ministers to “find a way to embrace the negotiators and encourage them to move forward, rather than, as it were metaphorically, bang them over the head”, a US state department official told Reuters.

“There was strong support for [Mr Kerry’s] efforts and an openness to considering his requests,” the official said.

Mr Kerry’s intervention drew criticism from Hanan Ashrawi, a senior member of the Palestine Liberation Organisation’s executive committee. “Reports of US lobbying the EU on behalf of Israel are extremely discouraging and cast serious doubts on the US mediation role,” she told the Jerusalem Post.

Baroness Ashton said the regulations – which prohibit the transfer of European funds to any Israeli organisation with links to or operating in the West Bank or east Jerusalem – simply formalised “what is currently the EU position”.

“We of course want to continue having a strong relationship with Israel,” she added, speaking at an EU foreign ministers’ gathering in the Lithuanian capital, Vilnius, which Mr Kerry also attended.

The remarks anticipated an intensive round of talks between EU and Israeli officials this week over Israel’s participation in Horizon 2020, a lucrative European research and development programme.

Israel has threatened to pull out of the project – to which it will contribute £515 million in return for much greater sums in future grants – unless the EU directive is watered down. Israeli academics have warned that such a move could devastate the country’s science and technology industries.

The rules were initially denounced as “external diktats” by Benjamin Netanyahu, the Israeli prime minister, while another Israeli official described them as “an earthquake”.

“The Europeans may think this is good for peace but the truth is that it undermines peace because it plays into the hands of Palestinian maximalists,” an offical in Mr Netanyahu’s office told The Telegraph.

“Kerry has said on the record that this is not helping his efforts.”

By contrast, Palestinian officials welcomed them, arguing that settlements formed the biggest stumbling block in efforts towards peace.

Khaled al-Attiya, Qatar’s foreign minister, called the Israeli settlements an “obstacle to peace” at a joint news conference with Mr Kerry after a meeting with the Arab Peace Initiative group in Paris on Sunday. Mr Kerry was later scheduled to meet Mahmoud Abbas, the Palestinian Authority president in London.

An EU delegation, headed by Pierre Vimon, head of the European external action service, will arrive in Israel on Tuesday to prepare the ground for a meeting in Brussels later in the week.