U.K. and Israel appear to reach tense truce, but diplomatic feud highlights Israel

London and Tel Aviv — The U.K. and Israel appeared Thursday to have narrowly avoided a major diplomatic confrontation, reaching a compromise to allow Britain's nearly 200-year-old consulate in east Jerusalem to remain open, but under a new name and with a significantly reduced staff.

The agreement — which has been framed very differently by London and Tel Aviv — may prevent the tension between the two longstanding allies from escalating, but it has highlighted how strained ties have become between Israel and several European governments over Israel's ongoing actions in the Palestinian territories.

The dispute began in September when London announced sanctions — along with 11 other Western nations — targeting Israeli settlements in the West Bank. The measures include a ban on goods produced in the settlements and sanctions against companies and individuals involved in facilitating settlement expansion.

Israel retaliated by giving Britain 30 days to close its east Jerusalem consulate. The facility has been operating since 1839, when Jerusalem was still part of the Ottoman Empire, predating the founding of Israel by more than a century. The consulate has historically operated independently of the U.K. Embassy in Tel Aviv, as Britain's principal diplomatic link with Palestinian officials in east Jerusalem, the West Bank and the Gaza Strip.

On Thursday, both governments sought to claim the diplomatic high ground.

"It is not possible to act against Israel without Israel taking appropriate measures in response," he wrote. "We did not want to reach this point, but the actions of the UK Labour Government brought us here."

Under the new arrangement, Britain's consul general and 19 diplomats will leave Israel, while no more than seven diplomats will remain at the renamed mission, according to Saar.

Miliband also said in his statement that the U.K. did "not accept that the Government of Israel has the legal right to close the British Consulate General in Jerusalem," reaffirming Britain's longstanding position that "East Jerusalem is occupied territory."

Both sides appeared to have moderated their responses because their bilateral security and business ties are too important to risk, Israeli political scientist Jonathan Rynhold told CBS News on Thursday.

"They found something to do without blowing the whole relationship up," Rynhold said of the compromise.

Israel regards Jerusalem as its capital, while Britain and much of the international community do not recognize Israeli sovereignty over east Jerusalem, which Israel captured from Jordan in the 1967 Six-Day War and subsequently annexed.

Spain has withdrawn its ambassador from Israel and imposed an embargo on arms sales to the Jewish state, while France formally recognized Palestinian statehood last year, drawing rebukes from the U.S. and Israel. Israel has also clashed with Ireland and Norway over their recognition of a state of Palestine.