As Israel pursues an expanded settlement agenda in Palestinian territory, even its friends are beginning to sound like its adversaries.

The European Union issued a damning report this week, calling the Israeli government’s construct-and-control strategy "the biggest single threat to the two-state solution" aimed at bringing peace to one of the Middle East’s most violence-prone regions. And for the first time in its annual evaluation of Israeli settlement policy, the 27-nation bloc that is Jerusalem’s most important trading partner hinted at a possible boycott of goods produced on illegally occupied land.

The criticism isn’t expected to have much influence with the government of Prime Minister Benjamin Netanyahu, even as he is forced to negotiate with more moderate Israeli political leaders to build a new coalition after the fractured Jan. 22 election.

But the EU report could provide a supportive backdrop during President Obama’s visit to Israel this month if the White House wants to use the occasion to urge an end to provocative actions that could scuttle prospects for a lasting peace.

In their 15-page report, the European envoys pointed to three building projects in East Jerusalem -- Har Homa, Gilo and Givat Hamatos -- and plans to build more than 3,400 housing units in territory east of Jerusalem known as E1 as "most significant and problematic" in preventing the Palestinians from securing a contiguous state.

The expansion and new construction projects are “part of a political strategy aimed at making it impossible for Jerusalem to become the capital of two states,” the report concluded.

The EU report recommended sanctions against illegal settlements to “prevent, discourage and raise awareness” about goods produced by the settlers for sale on international markets. The EU provides more than a third of Israeli imports, and more than a quarter of Israeli exports go to the Continent, according to EU trade figures.

Israeli government officials have dismissed the European criticism as biased and unhelpful.

“We are disappointed by this report because rather than building bridges between parties, as diplomats should, the European Union consuls once again have issued a one-sided report that only serves to inflame the situation,” said David Siegel, Israeli consul general in Los Angeles.

Siegel declined to discuss any potential impact from the EU report on Obama’s visit to Israel except to say that all issues would be on the table and that Israel’s stated policy is “that we should resolve these issues in direct negotiations with the Palestinians without preconditions.”

The EU’s implied threat to boycott goods made in settlements would be tough to implement, said Sara Hirschhorn, a scholar at Brandeis University’s Schusterman Center for Israeli Studies.

The European report “seems to cross a line not crossed before” in warning of economic consequences,  Hirschhorn said. “But it also shows a lack of understanding on the part of the Europeans that the economies of Israel and the occupied territories are so embedded that it is really hard to distinguish between one and the other. The Palestinian and Israeli economies are also tied together, so [sanctions] could damage the Palestinians as well.”

Hirschhorn sees a danger of Israel’s settlement-building creating a fait accompli of Jews living in territory expected to be part of a future Palestinian state.

As unrealistic as it may be to have Palestinians governing Jewish settlements, she said, “the idea is gaining in currency because there is such disillusionment about Israel being able to carry out the kind of withdrawals and disengagement that would be necessary” to return to the pre-1967 borders as Arabs demand as a condition for resuming dormant peace talks.

“But it has become popular among settlers who really don’t want to leave,” said Hirschhorn, and that is strengthening the notion that the settlements have reached a critical mass and become too populous for Israel to remove.

Alon Ben-Meir, a professor of Middle East studies and conflict resolution at New York University’s Center for Global Affairs, warns that Israel’s attempts to wall itself off from the Palestinians and Arab neighbors are undermining, rather than enhancing, its national security.

“Building a garrison state is isolating by its very nature,” he said of the settlements and the military deployments to protect them. “Israel needs to think how long this can be sustained. Can Israelis live another 50 years behind barbed wire and walls?”

Jewish settlers now number more than 550,000, Ben-Meir said, and each new incursion into the West Bank erects a new obstacle to returning to negotiations that could lead to a lasting peace.

“My concern is that if the Palestinians feel there is no movement, the relative quiet that exists today may not last,” Ben-Meir said, pointing out fears that a third Palestinian uprising is brewing. “Young men and women are dying in Syria by the tens of thousands, and many died in Egypt for freedom. If Palestinians lose all faith in the peace process, they would have no reason to accept subordination and occupation when their brothers and sisters are dying in rebellion against the same.”