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JERUSALEM (AP) Israel has resolved a diplomatic spat with the European Union over a funding ban on institutions operating in occupied areas claimed by the Palestinians, Israeli officials said Tuesday.

The dispute had shaken Israel's relations with Europe, its biggest trading partner, and drawn attention to Israel's much-maligned policy of building settlements in the West Bank and east Jerusalem. The Palestinians claim both areas, captured by Israel in the 1967 Mideast war, as parts of a future independent state.

The dispute surrounded the EU's "Horizon 2020" program, which enables participants to apply for funds for research and collaboration in areas such as climate change, renewable energy and food safety. The EU has budgeted more than 70 billion euros for the program, which is to run from 2014 to 2020, and officials estimate that Israel could gain 300 million euros from the complicated funding system over the seven-year period.

While Israel has long participated in similar programs, the EU has added some tough language to its eligibility guidelines to prevent funding for projects in the West Bank, east Jerusalem and other territories captured by Israel in the 1967 Mideast war.

"The EU does not recognize Israel's sovereignty over any of the territories ... and does not consider them to be part of Israel's territory," according to the guidelines.

Israel had feared the guidelines would make it ineligible for much of these funds since most universities and research centers have some activities in the West Bank or east Jerusalem.

Late Tuesday, Israel released what it said was a joint statement with the EU, saying that the compromise had been reached through discussions between Justice Minister Tzipi Livni and the EU's foreign policy chief, Catherine Ashton.

"The agreement fully respects the EU's legal and financial requirements while at the same time respecting Israel's political sensitivities and preserving its principled positions," the statement said. "The agreement will allow Israel's scientific community to benefit from one of the most important EU programs and facilitate its further integration into the European space of research and innovation."

The statement did not provide details on the compromise. But the Israeli daily Haaretz reported that it included an Israeli statement objecting to aspects of the guidelines, as well as pledges to ensure that EU funds be spent only in Israel proper, and not in the occupied territories.

The dispute with the EU had unnerved the Israeli government, which was caught between its continuing support for the settlements and preserving the country's status as a high-tech powerhouse.

"We are not prepared to divide the country through theoretical economic agreements," Israeli Economic Minister Naftali Bennett, a former high-tech tycoon who also heads the pro-settler Jewish Home Party, said earlier Tuesday. "We are ready to respect their position and that they will respect our position."

Officials said Prime Minister Benjamin Netanyahu convened an emergency meeting late Monday to discuss the crisis. Netanyahu is a longtime backer of the settlement movement, and his coalition is dominated by pro-settler elements.

The issue of Jewish settlements is at the core of the current impasse in Mideast peace efforts. For most of the past five years, the Palestinians refused to negotiate with Israel while settlement construction continued. The Palestinians claim the West Bank and east Jerusalem as parts of a future independent state.

Under heavy U.S. pressure, the Palestinians reluctantly agreed to resume talks over the summer. But by all accounts, the talks have made little headway, and have experienced a series of crises following Israeli announcements of new settlement plans.1

The Palestinians say the settlements are a sign of bad faith. More than 500,000 Israelis now live in the West Bank and east Jerusalem, making it increasingly difficult to partition the land.

Israel says the fate of the settlements should be decided in direct talks with the Palestinians. But the international community has shown growing impatience with the construction.

Last year, the United Nations General Assembly, over strong Israeli objections, recognized a Palestinian state along the 1967 boundaries and gave it upgraded observer status. More recently, U.S. Secretary of State John Kerry said in a televised interview broadcast on Israeli television that the continued construction raised questions about Israel's commitment to peace.