In this case, a Jewish organization and a company producing wine from the occupied territories challenged a French rule requiring products from the occupied territories to reflect their origin.
The French Council of State turned to the European Court of Justice (ECJ) for help in interpreting the relevant EU rules.
The Luxembourg-based judges upheld the French legislation, arguing that failing to specify that produce came from occupied territories might be misleading.
Simply indicating that goods originated in the state of Israel, when in fact they came from an occupied territory, could mislead consumers about the fact that Israel "is present in the territories concerned as an occupying power and not as a sovereign entity," the ECJ said in a statement.
Furthermore, produce from a settlement within an occupied territory must also be flagged accordingly, the court ruled, since consumers have no other way of knowing that the goods come from a settlement established "in breach of the rules of international humanitarian law."
Product information must allow consumers to make informed choices relating "not only to health, economic, environmental and social considerations, but also to ethical considerations," and to the observance of international law, the court said.
"Such considerations could influence consumers' purchasing decisions," the judges argued.
The case now reverts to France for a final verdict.
Palestinian Liberation Organization Secretary General Saeb Erekat welcomed the ECJ ruling, stating that it implements "a legal and political obligation."
Erekat went further in his statement, calling for an international ban on "products coming from illegal colonial settlements."
Anti-poverty campaign group Oxfam also applauded the decision.
"It is an important step in the right direction for the Palestinian people carrying the burdens of settlement expansion," said Oxfam's Shane Stevenson.
But Israeli Foreign Minister Israel Katz slammed the ruling as "unacceptable both morally and in principle."
His office issued a statement saying the decision "serves as a tool in the political campaign against Israel," while applying a double standard against Israel, since other territorial disputes were not treated by the ECJ in the same way.
European Jewish Association chief Rabbi Menachem Margolin called it "particularly galling" that the ruling came as Palestinian militants were launching rockets towards Israel following airstrikes on Tuesday targeting two senior Islamic Jihad leaders in Gaza and Syria.
The European Commission defended its stance, however.
"The EU considers settlements and occupied territories illegal under international law," commission spokeswoman Mina Andreeva said. She noted that Tuesday's ruling does not affect products from Israel, which has a privileged trading relationship with the bloc.
"The EU does not support any form of boycott or sanctions against Israel," Andreeva added.
-----------------------------------------------------------------------------------------------------------