Britain has advised UK supermarkets selling goods from the West Bank to state explicitly on the labels whether the content has come from Israeli settlement or Palestinian-owned farms.
The recommendation, issued by the Department for the Environment, Food and Rural Affairs (Defra), is not a legal requirement but Israeli officials and settler leaders have reacted angrily to the decision, saying it will lead to a boycott of their goods.
Until now, food has been labelled "Produce of the West Bank", but Defra's voluntary guidance says labels should give more precise information, like "Palestinian produce" or "Israeli settlement produce".
The Guardian, a British newspaper, said that 27 Israeli companies working in settlements and exporting to Britain had been identified, with stores selling such produce including Waitrose, Tesco, Sainsbury, Somerfield, John Lewis and B&Q.
Separately, Defra said retailers would be committing an offence if they declared produce from occupied Palestinian territories as "Produce of Israel".
The guidelines said: "Traders would be misleading consumers, and would therefore almost be certainly committing an offence, if they were to declare produce from the OPT, including from the West Bank, as 'Produce of Israel'.
"This would apply irrespective of whether the produce was from a Palestinian producer or from an Israeli settlement in the OPT [Occupied Palestinian Territories].
"This is because the area does not fall within the internationally recognised borders of the State of Israel."
Produce from the Israeli settlements includes cosmetics, pharmaceuticals, fruit and textiles.
European Union law already requires a distinction to be made between goods originating in Israel and those from the occupied territories, though pro-Palestinian campaigners say this is not always observed.
The Jerusalem Post, an Israeli newspaper, quoted Yigal Palmor, a spokesman for Israel's foreign minister, as saying that the guidelines were effectively "caving into Palestinian organisations, and will only radicalise Palestinian positions even more".
"The decision comes at a critical phase and harms Israeli and international efforts to renew the peace process on the basis of mutual agreements," Palmor said.
The Guardian quoted Dani Dayan, an Israeli settler representative, as saying that the decision was the "latest hostile step" from Britain.