VATICAN CITY, June 12 (Reuters) - The Vatican said on Tuesday that an economic agreement it is negotiating with Israel will not mean the de facto recognition of Israel's annexation of East Jerusalem.

The Vatican was responding to reports in Palestinian media that the deal, which involves tax status and other financial issues concerning Church properties in the Holy Land, would result in a recognition of Israel's control of East Jerusalem.

Palestinians want East Jerusalem to be the capital of an eventual homeland. Israel annexed East Jerusalem in the 1967 war and in 1980 declared the city its united and eternal capital. World powers have not recognized the annexation.

The agreement on which we have been working concerns the life, activities and fiscal regime of the Catholic Church in Israel, said Monsignor Ettore Balestrero, a Vatican diplomat who is negotiating the agreement.

In the agreement, we wished to steer clear of territorial disputes. We will not speak about East Jerusalem or places in the West Bank, he told Vatican Radio.

Both sides have been negotiating the agreement for years and there is no indication when they will reach an accord. (Reporting By Philip Pullella, editing by Diana Abdallah)