The South Burlington, Vermont-based company, which is owned by Britain's Unilever Plc (ULVR.L), has come under pressure from pro-Palestinian groups over its business in Israel and Jewish settlements in the West Bank, which is handled through a licensee partner since 1987.
Israeli Prime Minister Naftali Bennett, whose party favors Jewish settlements in the West Bank, said Ben & Jerry's was making a "morally wrong" decision.
More than 440,000 Israeli settlers live uneasily among some 3 million Palestinians in the West Bank, land that Israel captured and occupied in a 1967 war but which Palestinians say is the heartland of a future state.
On Monday, Ben & Jerry's said it would not renew its license agreement with its Israeli partner when it expires at the end of next year. It will, however, stay in Israel under a different arrangement, without sales in the Palestinian territories.
Unilever, in a separate statement, said it remains "fully committed" to its presence in Israel. It said it has always recognized Ben & Jerry's right "to take decisions about its social mission".
"We also welcome the fact that Ben & Jerry's will stay in Israel," Unilever said.
"We welcome the decision of any company to stop its work and investments in Israeli settlements," Wasel Abu Youssef, a senior member of the Palestine Liberation Organization.
Israel's Bennett said: "There are many ice cream brands, but only one Jewish state."
"The boycott against Israel – a democracy surrounded by islands of terrorism – reflects a total loss of way. The boycott does not work and will not work, and we will fight it with full force," he said.
"Ben & Jerry’s, a leading socially responsible international company, is finally bringing its policy on Israel’s regime of oppression against Palestinians in line with its progressive positions on Black Lives Matter and other justice struggles," it said.
Israel has said the BDS movement is motivated by a desire to paint Israel as illegitimate.
"Over 30 states in the United States have passed anti-BDS legislation in recent years. I plan on asking each of them to enforce these laws against Ben & Jerry's," said Israeli Foreign Minister Yair Lapid.
Ben & Jerry's was acquired by Unilever in 2000 in a unique deal that allows it to operate with more autonomy than other subsidiaries.
It is well known for its commitment to social justice that has recently included strongly supporting the Black Lives Matter movement, LGBTQ+ rights and electoral campaign finance reform.
source: Reuters with reporting by Siddharth Cavale in Bengaluru, Ari Rabinovitch in Jerusalem and Ali Sawafta in Ramallah; Editing by Peter Graff and Aurora Ellis