Government sources have told Sky News that Britain has threatened to "revisit" EU trade agreements with Israel in the wake of Israel’s warning that it may build 3,000 new settlement homes east of Jerusalem.

Israel’s warning comes following the UN vote last week to upgrade the Palestinian Authority from ‘entity’ to ‘non-member observer’ status.

After the vote, Israeli government spokesman Mark Regev said: "Because this is a clear violation of signed agreements, you can't expect Israel not to respond in a proportionate way."

The British government has denied reports that its ambassador to Israel, Matthew Gould, will be recalled.

Israeli Ambassador Daniel Taub has been summoned to the Foreign Office for immediate talks.

The Israeli ambassadors in Sweden and France were also summoned to government offices to discuss the decision to build new settlements.