"The European Union condemns the recent adoption of the 'Regularisation Law'", foreign policy chief Federica Mogherini said, arguing it "crosses a new and dangerous threshold by legalising under Israeli law the seizure of Palestinian property rights".
The 28-nation EU "urges the Israeli leadership to refrain from implementing the law and to avoid measures that further raise tensions and endanger the prospects for a peaceful solution to the conflict", she said in a statement.
Settlements in both the West Bank and east Jerusalem are viewed as illegal under international law and major stumbling blocks to peace as they are built on land the Palestinians want for their own state.
International criticism to the new law has mounted swiftly, with UN chief Antonio Guterres saying it is "contravention of international law", but the United States has been notably silent.