The legislation, dubbed "fascism" by one Israeli commentator, targets the efforts of artists, intellectuals and activists who have sought to protest Jewish settlements by boycotting their produce and institutions.
Championed by supporters of the settlements, the law passed despite the opposition of the Knesset's own legal adviser, who warned the bill "collided directly with freedom of expression in Israel" and was likely to be overturned by the country's Supreme Court.
Prime Minister Benjamin Netanyahu and seven of his coalition members were notably absent from the vote, with Israeli media reporting their fears that the law will negatively impact Israel's already fragile foreign reputation.
But despite their concerns about the repercussions, most of Netanyahu's Likud party has expressed support for the basic aim of the bill -- to effectively end domestic support for boycotts of Israel and its settlements.
Israel's leading opposition party Kadima criticized the legislation, but opted not to impose party discipline and allowed several of its members to vote in support of the bill.
The only unified opposition to the law came from the Knesset's leftist and Arab parties, which were unable to block the bill's 47-38 passage with the meagre 20 seats they command in the 120-member parliament.
Activist groups and Palestinian officials angrily accused the Knesset of seeking to declare settlements built on occupied territory a legal part of Israel.
"Under this new bill, Israel would be empowered to sanction those members of the international community who ... refuse to recognize the illegal situation associated with Israel's settlement enterprise in occupied Palestinian territory," PLO official Saeb Erakat said Monday.
"The bill seeks to enforce legal protection for an illegal project," added Hadas Ziv of Physicians for Human Rights-Israel in a statement on Tuesday.
Legal rights organizations and activists said they would challenge the law before the Supreme Court, and anti-settlement group Peace Now immediately announced it would defy the legislation.
It set up a Facebook group under the title "Prosecute me, I boycott the settlements!" that attracted several thousand followers.
Media outlets lined up to condemn the legislation, with Maariv newspaper pointing out that boycotts for a range of political and economic reasons are a part of Israeli life.
"There is no reason that ultra-Orthodox Jews should be able to boycott stores that sell pork (or that are open on the Sabbath), that masses of Israelis can boycott cheese producers and distributors, but left-wingers cannot boycott the produce of the settlements," the daily said.
Yedioth Aharanoth accused the legislation of "limiting freedom of speech and assembly," while legal experts warned the law was unlikely to survive judicial scrutiny.
Nurith Elstein, a former legal adviser to the Knesset, told military radio the law showed the unbridled power of the right-wing majority that currently dominates the Knesset.
"The new legislation, taken with other laws adopted by this Knesset, shows that those in power no longer exercise any restraint when it comes to imposing their will," she said.
But right-wing members of the Knesset issued their confident support for the legislation, with Danny Danon, a member of Netanyahu's Likud party warning that "those who support our enemies abroad should be subject to litigation and be made to pay the highest possible penalty under the law."
JERUSALEM (AFP) -- Despite a firestorm of criticism and the advice of the parliament's legal adviser, Israeli lawmakers have passed a bill effectively outlawing calls to boycott settlements in the West Bank.