Israel has slammed a move by the European Union to officially divide Jerusalem as a capital for both Israelis and Palestinians.

A proposed resolution for the EU Council has been drafted by Sweden, the current holders of the EU presidency, Ha’aretz reported. The draft says that the EU should recognise Palestinian statehood with East Jerusalem as its capital.

It states: “The goal is an independent, democratic, contiguous and viable state of Palestine, comprising the West Bank and Gaza and with East Jerusalem as its capital.

“If there is to be a genuine peace, a way must be found to resolve the status of Jerusalem as the capital of two states.

“The Council calls for the reopening of Palestinian institutions in Jerusalem in accordance with the road map.”

The Israeli Foreign Ministry has criticised the draft resolution, describing as a threat to the peace process.

Spokesman Yossi Levy said: “The process being led by Sweden harms the European Union's ability to take part as a significant mediator in the political process between Israel and the Palestinians.

"The Europeans must pressure the Palestinians to return to the negotiating table. Such moves like the one being led by Sweden lead to the opposite outcome."

EU foreign ministers, including British Foreign Secretary David Miliband will meet on December 7 in Brussels to discuss the proposal.

It is unclear whether the other 26 EU states will back it. Earlier this month, Carl Bildt, the Swedish prime minister, said he believed conditions were not yet right for Palestinian statehood.

Mr Bildt said: “I don’t think we are there yet. I would hope that we would be in a position to recognise a Palestinian state, but there has to be one first.”