The Irish Senate gave its support Wednesday to a draft law prohibiting the import of goods produced in occupied territories around the world, including Israeli settlements considered illegal under international law.
Israel reacted angrily to the proposal calling it "populist, dangerous and extremist", while a spokesman for the PLO expressed "sincere appreciation" for the initiative.
The proposed law was introduced by an independent senator and drew support from all of Ireland's major political parties, except the governing Fine Gael party.
The Irish government said the measure, unprecedented for a European Union member, was unworkable because it would impose a trade barrier within the European Union's single market and could harm Irish influence in the region.
Senators voted in favour of the Control of Economic Activity (Occupied Territories) Bill by 25 votes to 20, with applause rippling through the chamber after an impassioned debate.
It will now undergo further scrutiny in a senate committee, with the government set to continue trying to block it becoming law.
"We may have a long path ahead of us," said Senator Frances Black, the bill's author. "But I believe... we've made the case clearly."
Calling Israeli settlements a "war crime", she compared her proposal to early Irish efforts to oppose apartheid in South Africa, adding Ireland "will always stand on the side of international law, human rights and justice."
But Foreign Minister Simon Coveney warned it risked "fanning flames" in the Middle East.
"I respect this house and its decision but respectfully disagree," he said.
'Palestine's St Patrick's Day'
Israeli foreign ministry spokesman Emmanuel Nahshon said the vote would have "a negative impact on the diplomatic process in the Middle East".
"The absurd in the Irish Senate's initiative is that it will harm the livelihoods of many Palestinians who work in the Israeli industrial zones affected by the boycott," he said.
"Israel will consider its response in accordance with developments regarding the legislation," he said.
Saeb Erekat, Palestine Liberation Organisation secretary-general, welcomed the move.
"This courageous step builds on the historic ties between Ireland and Palestine, as well as it shows the way forward for the rest of the European Union," he said.
Israel has acted angrily to such moves in the past, heavily criticising the EU after it backed labelling products produced in its settlements in 2015.
It summoned the Irish ambassador for clarifications over the proposed legislation when it was first introduced in January.
Fadi Quran, Palestinian senior campaigner at pressure group Avaaz, who was in the senate when the bill passed, heralded July 11 "Palestine's St. Patrick Day".
"The settlements are immoral and illegal under international law, and Ireland is the first country to practise what the whole world preaches," he said.
"Now, others need to follow the Irish example."
Proponents of the measure argued Israel is profiting from its illegal settlements in the Palestinian territories and the stalled peace process shows no signs of yielding a resolution.
"The status quo has failed... that is why we are seeking a change," said Senator Colette Kelleher, who co-signed the bill.
"I'm asking you to lead Europe," she added, addressing her comments to Coveney.
But those opposed to the move said it could draw Ireland into trade disputes over contested territories in places like China, Cyprus and Crimea.
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