"Locally imposed boycotts can roll back integration as well as hinder Britain's export trade and harm international relationships," the Cabinet Office said in a statement on Monday.
"Town hall boycotts undermine good community relations, poisoning and polarising debate, weakening integration and fuelling anti-Semitism," it added.
The proposed rules are due to be announced later this week by Cabinet Office Minister Matt Hancock during a visit to Israel, the government statement said, without saying what penalties may be imposed.
|The measure would apply to the public sector as a whole, including the National Health Service.|
The move follows a series of local boycotts in recent years that have angered Israeli authorities.
In 2014, Leicester City Council instituted a boycott on goods made in Israeli settlements in the occupied West Bank.
A Scottish government notice to local councils in Scotland also "strongly discourages trade and investment from illegal settlements".
The European Union last year backed the labelling of products from Israeli settlements, in a move that Israel condemned as discriminatory and warned could harm the peace process with the Palestinians.
The Cabinet Office said it continued to support labelling "to ensure that individual consumers are able to make informed choices before they buy".
The Boycott, Divestment and Sanctions Movement [BDS] has strongly criticised the ban, saying it is similar to former prime minister Margaret Thatcher's support for apartheid.
"Rather than working to hold Israel to account for its ongoing human rights violations, UK ministers continue the arms trade with Israel and attack local democracy in order to shield it from any criticism," said Rafeef Ziadah, a UK spokesperson for the Palestinian BDS National Committee.
"Far from thwarting the growing public support for the Palestinian struggle for freedom, justice and equality, these measures simply shine a spotlight on the UK's deepening support for Israel’s oppression of Palestinians and underline the need for solidarity campaigning," he added.
An opposition Labour Party spokesman said the boycott ban was "an attack on local democracy".
"This government's ban would have outlawed council action against apartheid South Africa," he said.