Israel runs the risk of European economic boycott if it fails to advance peace talks with the Palestinians, Justice Minister Tzipi Livni warned on Monday.
"You cannot deal only with economic issues and ignore the political issue and the importance of a two-state solution," she told delegates at an accountancy conference in Eilat.
"Europe is boycotting products. And, true, it is starting with the settlements but their problem is with Israel, which is perceived as a colonial state, so it won't only stop with the settlements, but will (reach) Israel as a whole," she warned.
Livni was referring to plans by the European Union to start separately labelling products from Jewish settlements in the occupied Palestinian territories which are currently labelled as "made in Israel".
Israeli settlements in the West Bank, including annexed east Jerusalem, are viewed as illegal under international law, and goods produced there are not eligible for the same preferential tariffs enjoyed by Israeli exports to the EU.
Israel refuses to specifically label such goods as being produced in the settlements, merely providing postal codes of origin.
In May, an Israeli newspaper said EU plans to begin the new labelling system had been put on hold to avoid damaging efforts by US Secretary of State to kickstart direct negotiations after a nearly three-year hiatus.
But the report was denied by the European Union.
Livni, who is Israel's chief peace negotiator, said Europe did not understand the rationale behind settlement building, which was harming Israel's relations with the now 28-member bloc.
"In Israel, most people believe in the two-state solution, but with suitable security arrangements. By contrast there is a group that doesn't believe (in it)... that believes that seizing another hilltop is the way to prevent us from reaching an arrangement," she said, in remarks communicated by a spokesman.
"So the political issue is inseparable from both security and the economy."
Kerry on Sunday wrapped up four days of intensive talks with Israeli and Palestinian leaders, which ended without visible signs of progress.
Livni, who participated in some of the talks, said Israel needed to help Kerry's effort succeed.
Kerry "cares about what happens here. There are other hotspots in the world, and the US secretary of state is making huge efforts to be here. Our role is to help him.
"There are some who breathed a sigh of relief when he left, as if everything was over. People, we are still here with the problem and we will continue to make efforts to resolve it."