David Miliband, the Foreign Secretary, is embroiled in a diplomatic wrangle with Israel over Britain's attempts to restrict European imports from Jewish settlements in the West Bank.

The exchanges came after four Palestinian militants were killed by an Israeli airstrike on Gaza as they fired mortar rounds into Israel. One landed in the back yard of a home in the southern border town of Sderot, injuring one Israeli.

The Israeli Foreign Minister, Tzipi Livni, and the outgoing Prime Minister, Ehud Olmert, used meetings with Mr Miliband to complain about what an Israeli official earlier described as an "annoying" demand from the British Government for a tougher EU imports regime.

An internal note circulated to the 27 EU member states suggests that among measures "aimed at curbing settlement building" they should follow Britain's example by running more thorough checks to see whether goods from the settlements are "illegally" entering the EU without paying the required duties.

A spokesman for Mr Miliband said there had been a "clear exchange of views" on the subject with Mr Olmert, adding that the Foreign Secretary had made it clear the Government "was not trying to shift the goalposts but properly to follow up on representations made to it about the system".

Exemptions of Israeli goods from tariffs in Israel's trade agreement should not apply to goods produced in the settlements. But British officials believe produce made or grown in settlements – which the UK regards as illegal under international law – may still be benefiting from the exemptions.

Separately, Britain is trying to open a debate within the EU over labelling. The Government has been under pressure from non-government organisations to prevent goods being designated as being from the "West Bank" in ways which could lead consumers to believe they have a Palestinian origin.

An Israeli official said that the present agreement – which provides that the place of origin be denoted by post-code – had cut the Gordian knot of a long-running dispute between Israel and theEU when it was negotiated byMr Olmert in his time as Israel's trade secretary. Attempts to re-open the issue had a "political" dimension, he said.

Ms Livni is also understood to have made clear Israel's outright opposition to more detailed labelling of goods. Agreement to measures against goods produced in settlements might be illegal under Israeli law and would be "politically unsustainable", the official added.