The New Israel Fund is examining new grant-giving guidelines following a barrage of attacks from Israeli right-wing groups.
One of the key clauses being considered by the board and key donors would compel non-profit groups that wish to receive grants from the Fund to accept, to a certain extent, the principle of Israel being a Jewish state.
The New Israel Fund is the largest foreign donor to progressive causes in Israel and provides funding for non-profit groups helping disadvantaged groups in Israel, including battered women, Ethiopian immigrants and Israeli Arabs. It is also a key supporter of human rights groups.
Since last January, the group has been under fire from several organisations that have accused it of siding with Israel's detractors by funding groups that provided information to the UN's Goldstone Commission, which held an inquiry on the 2008-2009 Cast Lead military operation in Gaza. Critics of NIF also claim it promotes anti-Israeli studies.
The new guidelines, which are still being debated by the NIF leadership, could provide an answer to some of NIF's critics. One suggestion is to require that grantees state they recognise Israel as a Jewish homeland, a statement that would indicate support for the Jewish state although it would not rule out providing grants to organisations that believe Israel should become a bi-national state.
Officials at the New Israel Fund in Israel would not discuss the debate before the organisation's board makes a final decision.
However, Nicholas Saphir, chairman of NIF in Britain, said the issue of grant guidelines had been "blown out of all proportion".
He said: "Twice a year we have board meetings. As part of the three-day meeting in Israel we discussed our grants policy. Will it change anything? I don't think so. The controversial issues people are talking about are regarding boycotts and sanctions. We have said all along we believe in a two-state solution and a strong Israel, and boycotts and sanctions are not part of that.
"If any of our grantees are making a significant push for boycotts we would not be supporting them anyway. It's not a fundamental change."
Meanwhile, NIF registered a small victory when its chief critic, the Israeli Im Tirtzu group, lost one of its key funders in the United States.
Pastor John Hagee, who heads the pro-Israel evangelical group Christians United for Israel, announced that he was discontinuing support for the group. Pastor Hagee has given $200,000 to Im Tirtzu and now says the group misled him about its goals and operations.
Im Tirtzu was responsible for ads depicting the New Israel Fund as anti-Zionist and carrying images of NIF president, Naomi Chazan, with a large horn drawn on her forehead.