Pro-Palestinian campaigners are expected to disrupt a Scottish town’s summer festival over sponsorship from a French sewage company with business interests in Israel.

This weekend’s Leith Festival, held on the outskirts of Edinburgh, has been funded using a £3,000 grant from Veolia, which runs a water treatment plant in the town.

Organisers have refused to return the money despite being urged to do so by Scottish Palestine Solidarity (SPSC).

SPSC has encouraged supporters to leaflet the event and deliver a “presentation on Israel’s criminal occupation”.

Veolia had been expected to operate Jerusalem’s new light-rail project, currently under construction, but reports in Israel now suggest the company is seeking to pull out following criticism that the line will link the city centre with West Bank settlements.

Earlier this year, Veolia lost large contracts in Stockholm and Bordeaux as a result of boycott action.

It also faced a court case in France launched by a pro-Palestinian group attempting to halt the construction.

Gordon Munro, festival chairman, said: “We accepted the sponsorship in good faith. When we were approached by the SPSC the whole issue was news to us.”

Leith Festival is an annual community event which attracts thousands of locals and tourists. It has been sponsored by the plant for eight years.

SPSC chairman Mick Napier said protests would continue until Veolia formally announced its withdrawal from the Jerusalem project.

“Veolia’s decision, if confirmed, will be very significant. It won’t be the beginning of the end, but the end of the beginning. It will be a different order of boycott from now on.”

On its website, the SPSC claimed Veolia was “actively involved in furthering Israel’s violations of international law and the continuing dispossession of the Palestinian people. Veolia is using Leith Festival as a cynical public relations exercise”.

A Veolia spokeswoman said: “The festival is an important local event that is valued by the community and by our employees, many of whom live and work in the area.

“It relies heavily on support from businesses and we are pleased to be among the many local companies supporting the event this year.”