The international pressure on Israel to cease settlement-building and reach an agreement with the Palestinians is beginning to directly affect its economic prospects as European investment funds start to rethink their connections to the Jewish state.

PGGM, the second-largest pension fund in Holland, recently said it would divest its holdings in Israeli banks, citing concerns over their work in the settlements.

According to a report in the Financial Times this week, the largest Dutch pension fund, ABP, and two Scandinavian investment firms, are now considering similar steps and have asked the Israeli banks for clarifications.

While Israel has mobilised considerable resources to fight “delegitimisation” in the public sphere, the government still has no clear policy to counter major economic sanctions.

Last week, foreign ministries in Britain, France, Germany, Italy and Spain summoned Israeli ambassadors to protest against the government’s decision to build 1,400 new homes in the settlements.

Prime Minister Benjamin Netanyahu called the summons “hypocritical”, asking: “When did the EU call in the Palestinian ambassadors to complain about the incitement that calls for Israel’s destruction?”

The pressure is also coming from within Israel. A group of leading Israeli businesspeople took part in the World Economic Forum at Davos this week and called on Mr Netanyahu to reach an agreement with the Palestinians “urgently”.

Business leaders at the Breaking the Impasse forum in Davos said in a statement: “We know that if Israel wants a stable economy, a good future and continued growth, we must reach an agreement. The world is beginning to lose its patience and the threat of sanctions is becoming more imminent.”

Meanwhile, the leader of the right-wing Habayit Hayehudi party, Economics Minister Naftali Bennett, claimed on Monday that the establishment of a Palestinian state could jeopardise Israel’s economy. “What will Israel’s economy look like if once a year a missile fired from Judea and Samaria takes down a plane on its way to Ben Gurion Airport?” he asked.