Tourism minister, Yariv Levin, called on the firm to reverse what he called a “discriminatory decision” and “disgraceful surrender” to the boycott movement. He vowed that Israel would retaliate.
“If you have a policy of discrimination against Israelis you cannot earn money in Israel,” he said.
He added the government would encourage hosts in West Banksettlements to sue the company and make it “pay” for its decision.
Mr Levin said that Israel would impose other restrictions on Airbnb’s operations in the country, without elaborating.
The threat of sanctions against the firm comes as the country battles against the Boycott, Divesment, Sanctions campaign (BDS), which advocates boycotts against the country over its treatment of Palestinians.
It has claimed a number of successes in recent years, having helped push other large firms out of the West Bank. It has also disrupted film festivals, concerts and exhibitions around the world, by challenging artists appearing at them.
Airbnb announced earlier this week that it would delist around 200 properties in the coming days and cease its operation in Israeli settlements “that are at the core of the dispute between the Israelis and Palestinians”.
The company declined to comment on the Israeli threats.
Israel captured the West Bank and east Jerusalem in the 1967 Middle East war and today over 400,000 Israeli settlers live in the West Bank, in addition to some 200,000 Israelis in east Jerusalem.
Most of the international community considers settlements illegal and an impediment to the creation of an independent Palestinian state.
Israel sees the territory as disputed and says the fate of the settlements must be resolved in peace negotiations with the Palestinians.
Airbnb’s decision coincided with the publication of a Human Rights Watchreport investigating tourist rental listings in settlements by Airbnb and Booking.com.
Entitled Bed-and-Breakfast on Stolen Land, the report says Israeli settlements’ discrimination against Palestinians uniquely violates humanitarian law and Airbnb’s nondiscrimination policy.
Most Palestinians must obtain a permit to enter the settlements or Israel proper and typically do so as labourers.
Omar Shakir, Human Rights Watch’s Israel-Palestine director, said with its threatened sanctions, Israel was prioritising its support for settlements over a thriving tourism industry in Israel proper that relies on services like Airbnb. If applied, the sanctions could affect lodging costs for thousands of tourists expected to arrive in Tel Aviv next year for the Eurovision song contest.
Mr Shakir said the government’s response “reflects the degree to which the government is willing to go, putting the whole country’s interests at stake over its illegal settlements in the occupied West Bank”.
