EU nations agreed on Tuesday that Jerusalem should be the capital of both Israel and a future Palestinian state, assuaging Israeli anger over earlier mention of east Jerusalem as the Palestinian capital.

Jerusalem should provide "the future capital of the two states," as part of a negotiated settlement, European Union foreign ministers agreed in a text released after talks in Brussels.

However an earlier proposal by the Swedish EU presidency, to explicitly support the idea of east Jerusalem as the capital of a future Palestinian state, was dropped by the foreign ministers.

The European drafters' work achieved the significant feat of being welcomed on both sides of the Middle East divide.

"In view of the extreme draft submitted by the Swedish presidency at the start of the talks, we can only welcome the fact that at the end of the process the voice of the responsible and balanced states prevailed and helped balance and improve the text," Israel's foreign ministry said.

'Heavy pressure'

The Palestinians also welcomed the statement, but expressed regret that the Swedish text was dropped by the foreign ministers.

"This is a positive step even though we hoped for something stronger and clearer," said Nimr Hamad, a senior advisor to president Mahmud Abbas.

NONE"But we recognise the heavy pressure exercised by Israel and other sides, including European countries, in order to modify the text," he told AFP.

Swedish Foreign Minister Carl Bildt defended the compromise text, saying the controversy over the original version "has demonstrated that our voice carries much greater weight than we were perhaps aware of."

The EU text did still mention a "contiguous" as well as viable Palestinian state, something which would require the inclusion of part of Jerusalem.

It also states that the European Union "has never recognised the annexation of East Jerusalem."

The issue had been subject to intense discussion among the European ministers, with some nations wanting to keep the mention of east Jerusalem in the text and others reluctant to be seen as prejudging the result of any eventual Middle East peace deal.

Luxembourg's foreign minister Jean Asselborn was one of the ministers most supportive of the original Swedish proposal.

East Jerusalem is "not part of Israel," he said.

Others EU nations, notably Germany, Italy and the Czech republic, were reluctant to be seen to be imposing a settlement on Israel and the Palestinians.

"To decide here in Brussels what the future status of Jerusalem should be would be very frustrating for the negotiators," said Italian Foreign Minister Franco Frattini.

Indivisible and eternal

Jerusalem Mayor Nir Barkat wrote an open letter to new EU foreign policy chief Catherine Ashton warning of the possible consequences of splitting up the city which Israelis view as the indivisible and eternal capital of the Jewish state.

"Throughout the history of the world, there is not one important city that was divided that functioned successfully. They either reunited or ceased to function properly. The lesson is too clear. Jerusalem must stay united," he argued.

The EU initiative also raised some hackles in the United States.

EU members should join "responsible nations" in opposing any plan to recognise Arab east Jerusalem as capital of a future Palestinian state, said Ileana Ros-Lehtinen, the top Republican on the House of Representatives' foreign affairs committee.

The Simon Wiesenthal Center also criticised the EU draft resolution.

"Once again the EU is rushing with a laundry list of what's expected from Israel, but when will the European Union finally demand action from the Palestinians?" asked Rabbi Marvin Hier, founder and dean of the Jewish human rights group.

-AFP