A dozen Israeli companies working on a Palestinian construction project have signed contracts stipulating they must not use Israeli products originating in the West Bank, East Jerusalem or the Golan Heights.

The move has sparked calls from Jewish settler groups and their supporters for a counter-boycott.

The lucrative contracts are conditional on the firms agreeing to eschew "products of the territories" in line with the Palestinian Authority's boycott of goods and services from settlements.

The companies have signed agreements with Bayti, a Palestinian-Qatari group building a new city in the West Bank intended to become a hub for the technology industry and house 40,000 people.

The £850m Rawabi project is a sign of the West Bank's flourishing economy.

Israeli politicians and settlement supporters have condemned the contracts. Dozens of members of the Knesset (parliament) have called for the government to boycott Israeli companies that have signed the Rawabi deals, a demand backed by the Knesset's economics committee.

"Anyone building Rawabi should know that they won't build Tel Aviv," the rightwing pro-settler Knesset member Aryeh Eldad said.

The Land of Israel Lobby, headed by Eldad, said in a statement: "This is shameful and shocking collaboration with Palestinian economic terrorism." The companies had "sold their Zionist souls for a deal with the enemy".

Bashar Masri, Bayti's managing director, said the clause was not new, adding: "I have been insisting on this for three years at least. I always put this in as a condition up front. Someone has decided to make an issue of this now.

"It's the norm that we don't support the aggressor, those who take our land and make our lives miserable."

He said he expected "a whole lot more" Israeli companies to agree to the clause in order to win contracts with Bayti. "None of the people who have already signed have backed out, despite the threats of the radicals," he said.

The Samaria Settlers' Committee this week offered a 500 shekel (£90) reward to anyone disclosing the identity of companies involved. Two companies have been named in the Israeli media.

One, Ytong, which makes concrete blocks, denied it had agreed to boycott settlement products. "Ytong is not a partner to this boycott or any other," the firm said in a statement.

Another, Teldor Cables, has a factory in the occupied Golan Heights, according to a report in Israeli daily newspaper Yedioth Ahronoth.

The Palestinian prime minister, Salam Fayyad, has vigorously promoted a boycott of settlement produce in the West Bank, with shops ordered not to stock such goods.

The implementation of a law banning Palestinians from working in settlements has been delayed as alternative employment has not yet been found. An estimated 21,000 Palestinians work in construction, agriculture or industry in Jewish settlements.

The boycott movement has attracted support in other countries. Israel accuses its backers of trying to delegitimise the Jewish state.

An attempt by Masri to buy land from an Israeli company in East Jerusalem to build housing for Palestinians foundered this week after a campaign to block it.

The Jewish settlement of Nof Zion has been in financial difficulty for some time. "It's in the heart of East Jerusalem, surrounded by thousands of Palestinian homes," Masri said.

"But [the campaigners] wanted to block land going from a Jewish owner to a Palestinian owner. It's a racist issue – they made this very clear."