Some officials say that options for robust steps against Israel are limited due to a lack of unanimity in the 27-member EU and diplomatic protection of Israel by its cast-iron superpower ally the United States.
The prospect of punitive EU measures would rise if Israel continues to flout world opinion, but noises from Britain, France and Germany do not point to strong action for now.
Still, several options are open to the EU - one of Israel's biggest trading partners - to pressure Israel into ditching the settlement plan that Palestinians protest would rob them of territory crucial to their bid for a viable state and further dim chances of reviving frozen peace negotiations.
European foreign ministers, at a meeting in Brussels, were to discuss how to respond to the latest settlement plan.
British Foreign Secretary William Hague last week distanced the prospect of sanctions, and instead spoke of negotiations and formulating "incentives and disincentives" for peace talks.
France too discounted sanctions and has lowered expectations of tough measures, saying the onus must be on "persuasion" and reminding Israel of "principles and condemnations".
"There are ideas on the table, but let's see whether the Israelis actually go ahead with construction and what happens in the elections," said a French diplomatic source.
Israel is to hold parliamentary elections in January. Israeli officials said it could up to two years before any building begins in the designated zone east of Jerusalem.
Britain, France and several other European countries summoned Israeli envoys last week to protest over the plan to build settlements in an area of the West Bank known as E1, and even Israel's staunch European ally Germany voiced criticism.
Construction in E1 (East one) could divide the West Bank and make the creation of a contiguous Palestinian state - as envisaged by the internationally backed two-state solution to the Arab-Israeli conflict - almost impossible.
Settlement building on land Israel captured in the 1967 Middle East war is illegal under international law.
However, on Thursday during a visit by Israeli Prime Minister Benjamin Netanyahu to Berlin, Germany too appeared to emphasize a hands-off approach to Israeli decision making.
"Israel decides for itself, it is a sovereign state. All we can do as a partner is give our opinion and our evaluation," German Chancellor Angela Merkel said after meeting Netanyahu.
The right-wing Netanyahu has shrugged off world criticism and stressed Israel's right to defend its "vital interests".Europe's options
Israel's umbilical alliance with the United States and differing views within the EU have militated against concrete international action over expanding settlement in the West Bank.
"European governments individually and collectively express their frustration with policies adopted by the Israeli government .... but so far that frustration has not coalesced into a determination to take action like for example economic sanctions," said Menzies Campbell, a prominent member of the British parliament's Foreign Affairs Committee.
"The reasons for this are complex. A desire not to offend the Americans..., the fact that in some countries at least there is lingering guilt the Holocaust was allowed to take place and also the difficulty of getting a unanimous view on issues of this kind from the 27 members of the EU," he added.
Others see fewer obstacles to strong measures.
Left-wing European lawmaker Daniel Cohn-Bendit said unanimity was not required for some measures.
"They can decide on qualified majority. They don't need unanimity," he said, adding that without a credible threat, Europe would in effect be telling Israel, "Do what you want."
Chris Doyle, who heads Caabu, a think-tank on Arab-British relations, outlined a string of options open to EU countries.
As well as economic sanctions, EU states could cease cooperation on academic research, impose restrictions on goods produced in illegal Israeli settlements and even impose visa restrictions on members of far-right Israeli groups, he said.
European countries could also individually bolster bilateral relations with the Palestinians, a move likely to anger Israel.
"The Israelis will not budge unless they really believe there's intent. They've heard it all before. It's the Europeans jumping up and down. So what?" he said.
"If there is political will to take the necessary action, then a whole load of options become available."US pressure?
For its part, Israel appears even less likely than before to heed European protests over settlements, given that several European powers either voted yes or abstained in the Nov. 29 UN General Assembly vote on a Palestinian diplomatic upgrade.
The Palestinians won the vote, effectively securing UN backing for their bid for statehood, a move condemned by Israel and the United States as unilateral and hampering peace talks.
Israel's new settlements announcement came a day later.
"At this point the EU lost whatever credibility it had with this Israeli government," said Oded Eran, a former Israeli ambassador to the EU and now senior researcher at Israel's Institute for National Security Studies.
"I doubt there is a package, positive or negative, that can now convince Netanyahu to listen to European advice."
Key to whether Europe toughens its rhetoric to get Israeli attention will be Washington, which has also criticized the E1 settlement plan, albeit less forcefully than Europe.
Britain said it would on Monday repeat a plea for Washington to "take a decisive lead and push the peace process forward urgently" - diplomatic speak for more pressure on Israel.
While experts do not expect a radical change of policy by US President Barack Obama's administration, they have noticed a subtle shift in approach - one which could embolden the EU.
"A change you may be able to identify in the last few days is the Americans not investing diplomatic capital in calling everyone else off (over Israel)," said Daniel Levy, Middle East director at the European Council on Foreign Relations think-tank.
"It's very clear that no one is paying a price in their bilateral relations with America for taking a more assertive line," he added.
Israel appears increasingly isolated: after Arab Spring popular uprisings that have empowered Islamists, it has fewer security partners in Arab leaders than it once did in the region, while the United States appears keen on pivoting towards Asia, not expending more political capital on the Middle East.
Levy and other experts say public sympathy in Europe towards Israel is waning, a change that will become more difficult for elected officials to ignore over time.
Only a handful of countries voted with Israel in rejecting the Palestinians' diplomatic upgrade at the United Nations.
"No nation can live in isolation .... I hope for Israel's sake that she doesn't take friends for granted or underestimates the importance of having friends in all corners," said John Baron, another member of the British parliament's Foreign Affairs Committee.
LONDON (Reuters) -- The European Union will look at ways on Monday to press Israel to ditch a plan to build settlements in a highly sensitive area of the occupied West Bank, but hold off on tough action soon despite international outrage over the decision.