"Our ministry has started to prepare immediate measures to limit Airbnb's activities" in Israel, he said, adding that the government was prepared to back lawsuits launched by affected property owners against Airbnb in USA courts.
An evaluation by Airbnb "concluded that we should remove listings in Israeli settlements in the occupied West Bank that are at the core of the dispute between Israelis and Palestinians".
The announcement came before the publication on Tuesday of a damning report by the New York-based advocacy group Human Rights Watch on the negative implications of its settlement business.
UN Security Council Resolution 2334 states that the building of settlements in Palestinian territory "has no legal validity and constitutes a flagrant violation under global law". It was not clear what this would mean.
Palestinian leaders have long sought statehood and fought for the removal of Israeli settlements in the West Bank.
Ideologically driven Jewish nationalists who claim all of historic Palestine have since created outposts there, pushing out Palestinian residents.
Some 500,000 Israelis live in settlements in the West Bank and occupied East Jerusalem - areas that are also home to more than 2.6 million Palestinians.
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"Israeli settlements are not just an obstacle to peace, but defy the very definition of peace", he said in a statement. In similar previous cases, boycotts have constituted companies, performing artists, or others refusing to engage in business anywhere in Israel. It said it had previously allowed listings in Israeli settlements in the West Bank "because we believe that people-to-people travel has considerable value", adding that it had made the latest decision after weighing the issue over time and speaking to experts.
Human rights organizations hailed the decision as a positive step by the company.
An Airbnb spokesman told Reuters on Monday that the decision would take effect in the days ahead. Monday's decision did not seem to include the Golan Heights, which Israel annexed in 1981 in a move not recognized internationally.
"National conflicts exist all over the world, and the heads of Airbnb will have to explain why they chose to take a racist political stance against some of Israel's citizens", he noted.
However, it's unclear whether Airbnb's actions, which only affect one portion of territory that Israel claims and doesn't apply to the country's United Nations accepted borders, would constitute a form of boycott under Israeli or USA state law.
San Francisco-basked Airbnb is eyeing an IPO next year after announcing in February it would not make a public debut this year.
The response from Israel has been one of strong condemnation.