The import ban and associated sanctions, which Britain has framed as a sign of fresh support for the two-state solution, follows criticism of Israel's E1 settlement project in the West Bank.
Foreign Secretary Ed Miliband said the UK will ban imports of all goods from the settlements, and some services including financing, construction, infrastructure, real estate and advertising for settlements.
It's a significant toughening of Britain's stance towards Israel, whose conduct towards the Palestinians under Israeli Prime Minister Benjamin Netanyahu has increasingly been criticised by the UK and other Israeli allies.
Under Netanyahu's ultranationalist government, settlement construction in the West Bank has surged. The international community overwhelmingly considers such construction to be illegal and an obstacle to peace.
"The British government agrees that there is ethnic cleansing of Palestinians in areas of the West Bank, perpetrated by settler terrorists," Miliband said.
He said there had been "houses bulldozed, roads and public infrastructure destroyed, families displaced from their homes."
Miliband said he felt "a deep sense of shame about what has unfolded in Palestine under the eyes of the international community."
The United Kingdom, a longtime ally of Israel, recognised Palestinian statehood last year in an attempt to revive dwindling efforts to achieve a two-state solution.
The centre-left Labour Party government has previously sanctioned some Israeli settlers and illegal outposts over violence against Palestinians and illegal development in the West Bank.
UK Prime Minister Andy Burnham has voiced concerns about the E1 settlement project approved by Israel, which would effectively cut the territory in two. Palestinians and rights groups say it could destroy hopes for a future Palestinian state.
A tougher line on settlements is likely to be welcomed by many Labour voters and MPs, who have urged the government to go further in sanctioning Israel and supporting the Palestinians.
But some Labour members expressed concern that the move could boost support for Netanyahu, who is facing a tough battle for re-election in October, or lead to attacks on British Jews.
Israeli President Isaac Herzog said the ban would be "a grave miscalculation, a decision that will fall on the wrong side of history.
"In the current context, it would be a gross interference in the democratic elections of a sovereign nation," he said.
Senior Israeli ministers condemned the UK government's impending announcement. Foreign Minister Gideon Saar warned that "if Britain acts against Israel, Israel will act against Britain."
Itamar Ben-Gvir, Israel's hard-line public security minister, called on Netanyahu to recognise Argentina's claim to the Falkland Islands, a British overseas territory in the South Atlantic known in Argentina as Islas Malvinas.
The move was also criticised by the US ambassador to Israel, Mike Huckabee, who said it was "discrimination against the Jewish people."
He said the UK could face "repercussions or retaliations" from the US if it imposed the sanctions.
with AP
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