The European Union (EU) has issued guidelines this week that, for the first time, will ban funding any Israeli institutions operating inside the occupied territories.
I think the time has come for the end of a two-state solution and now a beginning of discussion of a one-state solution, where Arabs live with freedoms and equalities in the state of Israel ... all of us are tired of foreigners trying to tell the Middle East what to do.
The new directive means institutions beyond the Green Line, which marks the point of disengagement after the 1967 war, will not be permitted to deal with the EU.
Recognised in international law, the line defines the boundary between Israel and the occupied territories, which include the Golan heights and East Jerusalem.
These new guidelines will apply to economics, science, culture and education - and grants and scholarships will be the main type of funding to be affected.
So, any institution wanting EU financial support will be required to sign a clause stipulating that they operate solely within the country's pre-1967 borders.
Trade is one element that is, however, not covered by the new guidelines. The EU's decision has angered officials in Israel, including Prime Minister Benjamin Netanyahu.
"As Israel's prime minster, I will not let anyone harm the hundreds of thousands of Israelis living in Judea and Samaria, the Golan heights and Jerusalem, our unified capital," he said.
"We shall not accept any external dictates on our borders. This issue will be decided only by direct negotiations between the sides."
Israeli settlements have proved to be a major stumbling block in peace negotiations between the Israelis and Palestinians.
Settlements are Israeli communities built on Palestinian territories beyond the 1967 Green Line, the border that is often described as the basis for a Palestinian state. These settlements, which are home to about 520,000 Israelis, are dotted all over the West Bank and East Jerusalem.
The EU does not recognise Israeli sovereignty beyond June 1967 lines. Therefore, [it] has a long-standing policy of not providing funding for any kinds of activities that take place beyond the Green Line. The policy is not new. The fact that the rules of the game have been put down in writing, is what is really new.
The settlements have also led to a system where Palestinians and Israelis live under two different sets of laws in the West Bank - Palestinians insist the settlements prevent them from eventually having their own state, while for many Israelis, they serve their ideological and defence purposes.
And despite much international criticism, Israel has intensified its construction of new settlements, with many contending that this is a major obstruction to any attempt to forge a two-state solution.
US Secretary of State John Kerry is currently on his sixth visit to the Middle East since becoming the top US diplomat in February.
Kerry met Palestinian President Mahmoud Abbas and other Arab league officials on Tuesday. His aim is to revive the stalled Israeli-Palestinian peace talks that broke down almost three years ago, due to a dispute over continued Israeli settlement building.
Israeli officals say the EU's move may prove a stumbling block to renewed diplomatic efforts.
So how significant is the EU move? And will it help or hurt the stalled peace process?
On this edition of Inside Story, presenter Mike Hanna discusses with guests: Yishai Fleisher, host of the Yishai Fleisher radio show; Ali Abunimah, founder of The Electronic Intifada and a fellow at that Palestine Center; Ian Black, middle east editor of The Guardian newspaper; and Sandra De Waele, deputy head of mission at the Delegation of the European Union to Israel.
"The settlements are war crimes, people who aid and abet the settlement are and should be treated as war criminals. In that context, this European move is very small, very little and very late."
- Ali Abunimah, founder of The Electronic Intifada