BRUSSELS (AFP) - EU nations agreed on Tuesday that Jerusalem should be the capital of both Israel and a future Palestinian state, which was welcomed by Israel and the Palestinians. European Union Foreign Ministers, meeting for a second day of talks in Brussels, adopted a text agreeing that Jerusalem should provide the future capital of the two states, as part of a negotiated settlement. However an earlier proposal by the Swedish EU Presidency, to explicitly support the idea of East Jerusalem as the capital of a future Palestinian state, was dropped by the Foreign Ministers. An Israeli diplomat said afterward that it would be an improvement if East Jerusalem were not mentioned in the text. But there was enough left in the agreed text to raise Israeli hackles. It talks of a contiguous as well as viable Palestinian state, something which would require the inclusion of part of Jerusalem. It also states that the European Union has never recognised the annexation of East Jerusalem. The agreed EU statement insists that the European Union will not recognise any changes to the pre-1967 borders thereby refusing to recognise Israels right to occupy the area. Luxembourgs Foreign Minister Jean Asselborn was one of the ministers most supportive of the original Swedish proposal. East Jerusalem is not part of Israel, he said. Others EU nations, notably Germany, Italy and the Czech republic, were reluctant to be seen to be imposing a settlement on Israel and the Palestinians. The EU initiative also raised some hackles in the United States. Any move to divide Jerusalem would undermine our ally Israel, deal a blow to religious freedom, and undercut the cause of peace, said Ileana Ros-Lehtinen, the top Republican on the House of Representatives foreign affairs committee. In view of the extreme draft submitted by the Swedish Presidency at the start of the talks, we can only welcome the fact that at the end of the process the voice of the responsible and balanced states prevailed and helped balance and improve the text, Israels Foreign Ministry said. The Palestinians welcomed the statement, but expressed regret that the Swedish text was dropped by the Foreign Ministers. This is a positive step even though we hoped for something stronger and clearer, said Nimr Hamad, a senior advisor to President Mahmud Abbas. But we recognise the heavy pressure exercised by Israel and other sides, including European countries, in order to modify the text, he told AFP.