In a confidential 10-year forecast, foreign ministry analysts warned that Israel could end up on a collision course with the European Union and become increasingly isolated in the world over its policy towards Palestinians.
The report said if the 25-nation block could set aside internal differences and forge a unified foreign policy, it could cut into the clout wielded by the United States – Israel's chief ally – and "harm Israeli interests".
The report pointed out that a strengthened European body was expected to demand Israel reach a settlement with the Palestinians or face damaging economic sanctions.
"This could put Israel on a collision course with the European Union," it said. "Such a collision course holds the risk of Israel losing international legitimacy and could lead to its isolation in the manner of South Africa."
Israel's relations with the EU have long been strained over what it says is favouritism towards the Palestinians. It has deteriorated further in the face of European criticism of Israel's crackdown in occupied Palestinian towns.
The EU is critical of the military
action against Palestinians
Israel prefers to deal almost exclusively with Washington on Middle East diplomacy. But Palestinians have always insisted on a European role, seeing them as more sympathetic to their cause than Washington.
Israeli Prime Minister Ariel Sharon threatened in July to freeze the EU out of peacemaking after EU states backed a UN General Assembly resolution demanding that Israel tear down a barrier it is building largely inside the occupied West Bank.
Palestinians have condemned the barrier as a "racist apartheid wall".
Christina Gallach, spokeswoman for EU foreign policy chief Javier Solana, acknowledged "big disagreements" with Israel on peacekeeping but said Europe had the right to play a major role.
"Israel wants to limit EU ties to trade and technology," she said. "But we must have a part in the Middle East peace process."
In Geneva, a UN human rights investigator said on Thursday the EU should consider suspending a free trade deal with Israel because of its policies in the occupied territories.
Jean Ziegler, who investigates the right to food, said Israeli military action is directly responsible for rising hunger and health problems among Palestinians.