By Ori Lewis
JERUSALEM (Reuters) - Israel said on Friday it had resolved its differences with the European Union after weeks of diplomatic tension following an EU decision not to allow goods produced in settlements in the occupied West Bank to be labeled "Made in Israel".
Prime Minister Benjamin Netanyahu spoke by phone with EU foreign policy chief Federica Mogherini, Israel's foreign ministry said.
The two "agreed that relations between the two sides should be conducted in an atmosphere of confidence and mutual respect," it said.
Foreign Ministry spokesman Emmanuel Nahshon said that Israel would no longer insist on the exclusion of EU bodies from peace talks with the Palestinians over a two-state solution to the Middle East peace process.
Negotiations between Israel and the Palestinians broke down in April 2014 and there have been no signs of them resuming.
While the United States has traditionally played the lead role in peace efforts in the region, the EU is Israel's largest trading partner and is the biggest donor to the Palestinians, and is looking to play a larger role in peace negotiations
"The conversation resolved the tensions and we are, Israel and the EU, back to good and close relations," Nahshon said in a text message to the media.
In November, the EU said that goods produced in settlements could not labeled "Made in Israel" and should be marked as coming from settlements, which the EU considers illegal under international law.
The EU holds the position that the lands Israel has occupied since the 1967 Middle East war, including the West Bank, East Jerusalem and the Golan Heights, are not part of the internationally recognized borders of Israel.
After the guidelines were published, Israel suspended contact with EU bodies involved in peace efforts with Palestinians, although the government said bilateral ties with nearly all EU countries remained strong.
The Palestinians want the Hamas-controlled Gaza Strip and the Israeli-occupied West Bank for their future state with East Jerusalem as its capital.
Nahshon said Mogherini had expressed solidarity with Israel at a time of heightened Israeli-Palestinian violence and had strongly opposed attempts by various groups to boycott Israel.
Since October, 27 Israelis and a U.S. citizen have been killed in near-daily Palestinian attacks that have included stabbings, shootings and car-rammings.
Israeli forces have killed at least 157 Palestinians in the same period, 101 of them assailants, according to Israeli authorities. Other Palestinians have died during violent anti-Israeli protests.
The bloodshed has been partly fueled by Palestinian frustration over the stalled peace talks and anger at perceived Jewish encroachment on a contested shrine in Jerusalem.
(Editing by Hugh Lawson)