But the EU said it will ignore Israeli objections and continue to meet Palestinian officials at Orient House - the unofficial PLO headquarters in East Jerusalem.

The EU statement to Israel which was delivered to the Foreign Ministry by the German ambassador referred to a rarely used technical formula that declares Jerusalem an international zone outside Israeli sovereignty.

Israeli radio quoted the Prime Minister, Binyamin Netanyahu, as saying that Jerusalem will remain Israel's capital for ever and any attempt to undermine that position will be rebuffed.

Europe and most other countries refuse to recognise Israel's sovereignty over Jerusalem, saying the city's status is unresolved.

Israel captured the eastern half of Jerusalem in the 1967 Middle East War - the Palestinians want East Jerusalem as capital of a future state.

International law

EU sources say they responded to a strong letter from the Israelis to all foreign commissions, which they say forced the EU to reassert the status of Jerusalem in accordance with international law.

The letter from the Israeli Ministry of Foreign Affairs urged all foreign diplomats to ensure they did not hold meetings in Orient House, saying Jerusalem was an issue for the final status negotiations.

For Binyamin Netanyahu, Jersualem is an issue for the final status negotiations

The letter also pointed to Article 17 of the interim agreement, which says the offices of the Palestinian Council should be located in Palestinian territories.

But the EU reply stated that all of Jerusalem, including the Jewish sector, is a "corpus separatum" or separate body. This term is a direct reference to the 1947 UN resolution 181, designating Jerusalem an international zone.

Shada Islam: "They will not recognise Israeli sovereignty"

Observers say this is the first time the EU has referred so explicitly to the 1947 resolution and does set a precedent.

Shada Islam, a Brussels-based journalist and expert on the EU and the Middle East, said: "Every single EU delegation that I've heard ... always made it a point, a very strong point, of actually going to Orient House and meeting Palestinian leaders there.

"And that's been the EU's way of saying very clearly to the outside world and to Israel that they consider Jerusalem an international city. And until the final status talks take place they will not recognise Israeli sovereignty over that city."