A coalition of 22 non-governmental organisations has called on the European Union to ban products from Jewish settlements in the West Bank.
EU member states import 15 times more goods from settlers than from Palestinians living there, they say.
They want a range of measures adopted to stop assisting settlement expansion, including produce labelling guidelines.
Settlements in the West Bank are considered illegal under international law, though Israel disputes this.
On Friday, the EU's foreign policy chief said settlements threatened to make a two-state solution to the Israeli-Palestinian conflict impossible.
Palestinian Authority President Mahmoud Abbas says he will not resume direct talks until Israel freezes all settlement construction and accepts the ceasefire lines which existed before the 1967 Middle East war as the basis for the borders of a Palestinian state, with agreed modifications.
The Israeli government wants existing settlement blocs to become of a part of Israel and calls for a resumption of talks without preconditions.
In the report published on Tuesday, entitled Trading Away Peace: How Europe helps sustain illegal Israeli settlements, the coalition of NGOs says there is inconsistency at the heart of EU policy.
"The EU states 'settlements are illegal under international law, constitute an obstacle to peace, and threaten to make a two-state solution impossible', but continues to provide a primary export market for settlement products," the report says.
There are an estimated 500,000 settlers and 2.6 million Palestinians living in the West Bank and East Jerusalem. However, the EU currently imports 230m euros ($300m) of goods a year from settlements in the West Bank, compared to only 15m euros ($19m) from Palestinians.
According to the report, settlement-based farmers and manufacturers benefit from wide-ranging Israeli government subsidies and enjoy easy access to international markets via government-built roads that bypass Palestinian-populated areas.
In contrast, it says the Palestinian economy is severely constrained by Israeli restrictions on access to markets and natural resources, resulting in exports declining from more than half of GDP in the 1980s to less than 15% of GDP and helping make the PA dependent on foreign aid.
The report calls on European governments to "adopt a range of concrete measures to stop assisting settlement expansion and close the gap between words and practice".
"At a minimum, the coalition is calling for clear labelling guidelines to ensure European consumers do not unknowingly buy settlement goods. Such guidelines already exist in the UK and Denmark," it adds.
In 2009, the UK issued voluntary guidelines advising retailers that goods from the West Bank should be clearly marked "Israeli settlement produce" or "Palestinian produce".
The EU should also discourage companies from trading with and investing in settlements, and, as a further-reaching measure, ban imports of settlement products, it argues. That, it says, "is not a ban or boycott on trade with Israel, which the signatories to this report do not advocate".
A spokesman for the EU delegation to Israel told the BBC: "This is a comprehensive report often drawing on statistics provided or statements made by EU institutions.
"The report represents an important contribution to the ongoing debate on this and other issues related to the Middle East peace process. The European External Action Service does not always agree with the conclusions reached in the report."