Israel has resolved a diplomatic spat with the European Union over a funding ban on institutions operating in occupied areas claimed by the Palestinians, Israeli officials said Tuesday.

The dispute had shaken Israel's relations with Europe, its biggest trading partner, and drawn attention to Israel's much-maligned policy of building settlements in the West Bank and east Jerusalem. The Palestinians claim both areas, captured by Israel in the 1967 Mideast war, as parts of a future independent state.

The dispute surrounded the EU's “Horizon 2020” program, which enables participants to apply for funds for research and collaboration in areas such as climate change, renewable energy and food safety. The EU has budgeted more than 70 billion euros ($95 billion) for the program, which is to run from 2014 to 2020, and officials estimate that Israel could gain 300 million euros ($400 million) from the complicated funding system over the seven-year period.

While Israel has long participated in similar programs, the EU has added some tough language to its eligibility guidelines for funding projects in the West Bank, east Jerusalem and other territories captured by Israel in the 1967 Mideast war.

“The EU does not recognize Israel's sovereignty over any of the territories ... and does not consider them to be part of Israel's territory,” according to the guidelines.

Israel had feared the guidelines would make it ineligible for much of these funds since most universities and research centers have some activities in the West Bank or east Jerusalem.

Three Israeli officials said late Tuesday that a compromise had been reached. But they refused to give details. The Israeli daily Haaretz reported that Israel and the EU had agreed to find ways to ensure that EU funds be spent only inside Israel's pre-1967 boundaries and prevent the money from going to the occupied territories.

The officials spoke on condition of anonymity pending a formal announcement. EU officials were not immediately available for comment.

The dispute with the EU had unnerved the Israeli government, which was caught between its continuing support for the settlements and preserving the country's status as a high-tech powerhouse.

“We are not prepared to divide the country through theoretical economic agreements,” Israeli Economic Minister Naftali Bennett, a former high-tech tycoon who also heads the pro-settler Jewish Home Party, said earlier Tuesday. “We are ready to respect their position and that they will respect our position.”

Officials said Prime Minister Benjamin Netanyahu convened an emergency meeting late Monday to discuss the crisis, and that his justice minister, Tzipi Livni, worked with European officials on the compromise.

The issue of Jewish settlements is at the core of the current impasse in Mideast peace efforts. For most of the past five years, the Palestinians refused to negotiate with Israel while settlement construction continued. The Palestinians claim the West Bank and east Jerusalem as parts of a future independent state.

Under heavy U.S. pressure, the Palestinians reluctantly agreed to resume talks over the summer. But by all accounts, the talks have made little headway, and have experienced a series of crises following Israeli announcements of new settlement plans.

The Palestinians say the settlements are a sign of bad faith. More than 500,000 Israelis now live in the West Bank and east Jerusalem, making it increasingly difficult to partition the land.

Israel says the fate of the settlements should be decided in direct talks with the Palestinians. But the international community has shown growing impatience with the construction.

Last year, the United Nations General Assembly, over strong Israeli objections, recognized a Palestinian state along the 1967 boundaries and gave it upgraded observer status. More recently, U.S. Secretary of State John Kerry said in a televised interview broadcast on Israeli television that the continued construction raised questions about Israel's commitment to peace (AP)