The European Union decided Monday not to upgrade ties with Israel despite Prime Minister Binyamin Netanyahu's agreement in principle on Sunday to establish a Palestinian Authority-led Arab state. EU leaders had previously announced that they would not upgrade ties with Israel until seeing progress in Israel-PA talks.

EU ministers labeled Netanyahu's speech “insufficient.” In order to upgrade ties, “we need a few steps more,” said Luxembourg Foreign Minister Jean Asselborn.

French Foreign Minister Bernard Kouchner and Finland Foreign Minister Alexander Stubb agreed that Netanyahu's speech did not warrant an upgrade in ties. Kouchner praised Netanyahu's government for refusing to grant building permits to Jews living in Judea and Samaria, but criticized the Prime Minister for failing to mention the Israeli presence in Judea and Samaria in his speech.

Italian Foreign Minister France Frattini expressed concern over Netanyahu's comments regarding Jerusalem. Netanyahu referred to Jerusalem as Israel's united capital, a statement that angered PA leaders, who claim eastern Jerusalem as their future capital.

EU ministers are scheduled to meet Monday evening with Foreign Minister Avigdor Lieberman.

The EU froze plans to improve financial and political ties with Israel in early 2009. EU ministers have demanded that Israel first commit to the establishment of an Arab state in Judea, Samaria and Gaza.

The PA has expressed support for the freeze in EU-Israel relations. PA leaders have called on the EU to insist that Israel freeze all construction in Jewish towns in Judea and Samaria, and remove checkpoints and roadblocks in the area.