The Department for the Environment, Food and Rural Affairs (Defra) advice is being viewed by Israel as a way to enable consumers to boycott Israeli goods. Until now food from the area has been labelled ‘Produce of the West Bank'.
Sainsbury's and Waitrose are among the supermarkets who have pledged to comply with the new guidance.
Yigal Palmor, Israeli foreign ministry spokesman, said he was ‘extremely disappointed by the changes', arguing that they discriminate against Israel.
The Foreign Office denied the move was an attempt to spark a boycott. But added: ‘We believe consumers should be able to choose for themselves what produce they buy.'
There are around 500,000 Jewish settlers living in East Jerusalem and the West Bank, which were occupied in the 1967 war.