The country’s Prime Minister Naftali Bennett said on Tuesday that the move was “morally wrong” and would prove to be “financially wrong”.
His comments came after the company said sales in the territories are “inconsistent with our values”, adding that the move reflected the concerns of “fans and trusted partners”.
The changes will be made by allowing current licensing arrangements to expire at the end of next year, it added.
Ben & Jerry’s did not go into more detail about the reasons behind its decision.
It did, however, say that it will still stay in Israel under a different arrangement without sales in the West Bank.
The region has been under Israeli control since 1967. Most of the world considers the settlements illegal under international law, though Israel disputes this.
“The boycott of Israel - a democracy surrounded by islands of terror - reflects a complete loss of bearings. The boycott does not work and will not work, and we will fight it with all our might,” Mr Bennett said.
Gilad Erdan, Israel’s ambassador to Washington, said he had raised the Ben & Jerry’s decision in a letter sent to 35 US governors.
“Rapid and determined action must be taken to counter such discriminatory and antisemitic actions,” read the letter, tweeted by the envoy.