An internal report by EU diplomats made public Saturday claimed Israel was undermining prospects for a Palestinian capital in east Jerusalem by building more housing for Jews there and demolishing Palestinian-owned homes. The policy is being carried out at an accelerated pace and is hindering chances of establishing a Palestinian state alongside Israel, said the 20-page report, written in December. "Israel is, by practical means, actively pursuing the illegal annexation of East Jerusalem," the report said. The document was made available to journalists Saturday by the Israel Committee Against House Demolitions, a Jerusalem based human-rights group. An EU diplomat contacted by The Associated Press verified its authenticity. Prime Minister Ehud Olmert has said that a division of the city is inevitable in any peace deal, but has not said where he would draw the line. "There will be no peace if a significant part of Jerusalem is not the capital of the Palestinian state," Olmert said Friday. However, Prime Minister-designate Binyamin Netanyahu opposes Palestinian statehood and supports the expansion of Israeli settlements on land claimed by the Palestinians, including east Jerusalem. The EU report said that "long-standing Israeli plans for Jerusalem, now being implemented at an accelerated rate, are undermining prospects for a Palestinian capital in East Jerusalem and a sustainable two- state solution." Palestinians in Jerusalem and the West Bank staged a general strike last month to protest plans to demolish 88 Palestinian homes in the Silwan neighborhood of east Jerusalem. Municipal officials say the structures were built without permits and must be torn down. However, Palestinians say Israeli authorities rarely grant building them building permits in east Jerusalem, and that they are forced to build without licenses. US Secretary of State Hillary Rodham Clinton, visiting the region last week, called the Israeli policy "unhelpful" and in violation of a US-backed Mideast peace plan. Palestinian Authority President Mahmoud Abbas said that carrying out the demolition orders would have "a devastating impact on the peace process." Immediately after the 1967 war, Jerusalem Palestinians were offered Israeli citizenship, though at the time most declined for fear they'd be seen as accepting Israeli rule. The annexed area is home to around 210,000 Palestinians and 190,000 Israelis. Another 360,000 Israelis live in the western part of the city. Israel recognizes no division between the sectors, proclaiming the city its "eternal and indivisible capital" and it does not consider a Jewish presence on the east side as constituting settlement. Government spokesman Mark Regev said Saturday that Israel has not seen the EU report and that he could not comment on it directly. However, he said government policy is evenhanded. "The government is committed to the development of the city for the benefit of all its population, both Arab and Jewish," he said. The EU report contests that assertion."Some of the Jewish settlements lack building permits, but are rarely demolished - in marked contrast to the situation for Palestinians," it said. Since a US-hosted peace summit in November 2007, where Israel recommitted itself to Palestinian statehood and a settlement freeze, around 3,000 new housing units for Jewish families in east Jerusalem had been approved and 2,500 more were under consideration, the report said. Such a policy would only make an eventual negotiated agreement on Jerusalem - and broader Mideast peace - that much tougher to reach, the report said. "More Israeli settlers - and fewer Palestinian residents - in East Jerusalem will only make eventual Israeli concessions on Jerusalem much harder," it said. "Thus Israel's actions in and around Jerusalem constitute one of the most acute challenges to Israeli-Palestinian peace making."