Britain will also no longer participate in a US-led coordination mission for Gaza and some British officials, including former Labour party leader Jeremy Corbyn, and other nationals will be banned from entering Israel, Israeli Foreign Minister Gideon Saar said.
"The British move is morally distorted, and constitutes blatant interference in the affairs of a sovereign state and its electoral process," he said, describing comments by Foreign Secretary Ed Miliband about ethnic cleansing of Palestinians by Israel as accusations that were "outrageous lies".
The British consulate in East Jerusalem is accredited to the Palestinian Authority in the West Bank.
Saar said that he had coordinated Israel's response with Prime Minister Benjamin Netanyahu as Israeli President Isaac Herzog accused Britain of interfering in Israel's upcoming elections, due in late October.
The trade measures proposed by Britain, France and Canada on Tuesday are the latest in a series of actions targeting Israel's settlement policy and underscore its growing diplomatic isolation among some of its traditional allies.
They were joined by the foreign ministers of 10 other countries, including Denmark, Norway, Poland, Spain and Sweden, in a statement reaffirming support for a negotiated two-state settlement - a Palestinian state co-existing peacefully alongside Israel. Concern is mounting over settlement expansion and violence in the Israeli-occupied West Bank.
"Together, we are resolute: the two-state solution must be protected, and we will take action in pursuit of a just and lasting peace," they said.
Miliband said on Tuesday that Britain could no longer simply "call out" injustice and suffering, but had to act to oppose the expansion of settlements, which he said threatened the viability of a Palestinian state.
"Successive Canadian governments have held the position that a two-state solution is the way forward for long-term peace that also addresses Israel's legitimate security concerns. Illegal settlements in the West Bank significantly undermine these objectives," Canadian Foreign Minister Anita Anand wrote on X.
The United Nations, Palestinians and most countries regard settlements as illegal under international law. Israel disputes this. A Reuters report published on Tuesday found Israel's government is financing some of the West Bank's most radical settlers, who use illegal outpost farms to displace Palestinians.
France, also introducing a ban on West Bank products, cited the "frenzied expansion" of settlements there and a "flare up of violence" as the reasons for it taking action.
But US Secretary of State Marco Rubio said on Tuesday that the sanctions could be destabilising for the West Bank, adding that Washington would not follow Britain, France and Canada in blocking imports from Israeli settlements.
The main produce from West Bank settlements is agricultural, including dates, citrus fruits, herbs and wine, and makes up only a tiny fraction of Israel's total exports.
Given the small volume of exports from the settlements, the trade bans are largely symbolic, and will not dent larger bilateral trade flows, but are part of wider efforts to reinforce support for the two-state solution, just as Israel announced plans for 1000 new West Bank homes on Tuesday.
Miliband, who became Britain's foreign minister in July, went further, saying the UK believes that there is ethnic cleansing of Palestinians in areas of the West Bank.
"Today we refuse to be bystanders to further suffering and to the destruction of the two-state solution," Miliband said, referring to Britain's long-held support for the idea, which Israel opposes.
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