The decision appears to end a nine-month peace initiative by U.S. Secretary of State John Kerry. The negotiating period is scheduled to end next Tuesday, though the sides had been trying to agree to an extension.
Israel's Security Cabinet unanimously decided to cut off contacts after a five-hour meeting Thursday. They announced the decision in a statement sent to journalists.
Israel is furious over Palestinian President Mahmoud Abbas' decision to form a unity government with the rival Hamas movement after a seven-year rift.
Israel and the West consider Hamas a terrorist group.