“The conflict between Israel and Palestine can only be solved by a two-state solution, negotiated in accordance with international law. It must guarantee both the Palestinians and Israelis' legitimate demands for national sovereignty and security”, he said.

“A two-state solution requires mutual recognition and a will to peaceful co-existence. Sweden will therefore recognise the state of Palestine”.

The step is the first ever by a sitting member of the EU.

Six former Communist EU countries, as well as Cyprus and Malta, recognised Palestine in the 1980s before they joined the European Union.

But their pre-EU policies have little meaning today: When Palestine asked the UN in 2012 to recognise it as an “observer state” the Czech Republic was the only EU country which voted No despite recognising its sovereignty in 1988.

Fourteen others voted in favour, while the rest abstained in a sign of ongoing division in the bloc.

Lofven’s announcement caught both Swedish and EU diplomats by surprise.

A Swedish source told this website it “marks a really big shift in the Social-Democratic party”. An EU contact said Palestine has stepped up its “lobbying campaign” in Europe: “They had hoped that France would take the step after [Palestinian] president Abbas visited Paris last month, but this didn’t happen”.

The Swedish move came the same day the EU published a statement criticising Israel’s plan to build thousands of new settler homes in East Jerusalem.

The EU communique used forceful language - “condemned” - and said “development of relations between the EU and Israel will depend on the latter's engagement towards a lasting peace”.

Some analysts saw it as a sign of impending action.

But the EU contact said it is not. “The wording is not new and was taken from recent [EU] Council conclusions”, he said.

The European Commission is currently drafting a code for EU retail labels on settler exports, but the work is still ongoing.

It recently banned exports of settler milk and poultry products saying Israeli food safety authorities, which certify the goods, have no jurisdiction in Palestine. But this is part of a tidying-up process of existing EU law rather than a political sanction.

The new settlements mark the first expansion in East Jerusalem for more than 10 years.

The EU source said one set of settler homes, in Silwan, is “very sensitive” because it is in the Holy Basin - a part of the old city which hosts Jewish and Muslim sacred sites.

A second bloc, in Givat Hamatos, “greatly diminishes” prospects of a two-state solution because it helps enclose Jerusalem, which is claimed by both sides as their capital, in a ring of Jewish-only suburbs.