West Bank - Prime Minister Salam Fayyad threw a box of settler products on a bonfire this week as Palestinians pushed a campaign to cleanse their markets of goods made by Israelis living in the West Bank.

Fayyad said if Palestinians wanted to persuade the European Union to ban trade with the settlements -- considered illegal under international law -- they would have to do it themselves first.

Fayyad's government has confiscated merchandise worth $2 million since November.

This is a merciless campaign and there will be a zero tolerance for those who deal with this trade, said Abdelhafiz Nofal, a senior official at the Palestinian economy ministry.

The campaign does not include products from Israel proper, which Palestinians rely on. Campaigns by some local groups to boycott all trade with Israel have had very little success.

Palestinian officials estimate that Israel-run companies in the settlements sell goods worth $500 million per year into the West Bank market, from construction materials to nuts.

Cutting off this trade will undermine settler viability in the Israeli-occupied territories that Palestinians want for a state, the campaigners believe.

This is an expression of our rejection to settlement activity in all its forms, said Fayyad as fire consumed a heap of goods at Salfit, a West Bank town ringed by settlements which include industrial operations.

If Palestinians are allowed to carry on buying settler goods, they will cement the economic activity of settlements and settlers, he said.

What we are looking for is to have a state without settlements and without walls and what we are doing in Salfit is an important step on this path, Fayyad said.

LIST OF 50 PRODUCTS

Palestinian President Mahmoud Abbas refuses to resume stalled peace talks with Israel until it freezes West Bank settlements. Israel in November ordered a partial, 10-month freeze but is still building some new homes on occupied land.

The Palestinian campaign targets over 50 products. Customs officers can seize merchandise already on the shelves of Palestinian shops if they can prove it is settler-made.

Settler firms use tricks to escape inspection measures and deceive end-users, Nofal said. Boxes of dates being shipped to Turkey bore labels showing Jerusalem's Dome of the Rock, to make them look Islamic and Palestinian-grown.

Under an EU-Israel Association Agreement, settlement goods from the West Bank, East Jerusalem and the Golan Heights are not entitled to preferential tariff treatment that Israeli products enjoy and are subject to the payment of duties.

In 2005, the EU and Israel negotiated a technical arrangement under which customs authorities of member states may identify settlement exports to the EU. This is implemented homogeneously in the whole EU territory, an EU official said.

Britain was criticized by Israel in December for advising supermarkets to label produce from Jewish settlements clearly, to distinguish it from goods produced by Palestinians.

But Palestinians believe lots of settler output is slipping through the net, benefiting from preferential trade agreements intended strictly for Israeli exports.

Settlement activity is illegal, said Fayyad, a former World Bank economist. Anything that goes into supporting this enterprise is illegal and this brings with it a measure of accountability that countries around the world and their nationals are beginning to understand better.

(Additional reporting by Brussels bureau; editing by Douglas Hamilton and Charles Dick)

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