The European Union stepped up its opposition to Jewish building in east Jerusalem on Monday.

In an internal document sent to 25 EU Consuls General in Jerusalem, the EU said: "Israel has left Palestinian neighbourhoods ever more isolated" and "by legal and practical means, is actively pursuing its [illegal] annexation by systematically undermining the Palestinian presence in the city," London-based The Independent reported.

Additionally, the Consuls General suggested that they should be present during house demolitions in the city, attend demolition and eviction related court proceedings and "ensure EU intervention when Palestinians are arrested or intimidated by Israeli authorities for peaceful cultural, social or political activities in east Jerusalem," according to the report.

The document followed the demolition of the Shepherd Hotel in east Jerusalem on Sunday.

"If current trends are not stopped as a matter of urgency, the prospect of east Jerusalem as the future capital of a Palestinian state becomes increasingly unlikely and unworkable," the document continued. "This, in turn, seriously endangers the chances of a sustainable peace on the basis of two states, with Jerusalem as their future capital," the Independent reported.

Criticizing Israeli policies as negatively affecting Palestinian life, the EU diplomats cited "restrictive zoning and planning, ongoing demolitions and evictions, an inequitable education policy, difficult access to health care, the inadequate provision of resources and investment," according to the report.

Describing the political consequences of Israeli policy in the capital as being of "great concern," the document added: "Over the past few years the changes to the city have run counter to the peace process. Attempts to exclusively emphasise the Jewish identity of the city threaten its religious diversity and radicalise the conflict, with potential regional and global repercussions," the Independent wrote.

On Sunday, US Secretary of State Hillary Clinton slammed the demolition of the Shepherd Hotel, saying that it undermined US peace efforts and "contradicts the logic" of a negotiated two-state solution.