The firm, which manufactures a device for making fizzy drinks at home and which was embroiled in a row earlier this year involving Hollywood actress Scarlett Johansson, said it would relocate the factory by the end of 2015.
SodaStream said the plant closure would "improve the operational efficiency" of a group that has been listed on the New York stock exchange since 2010. Another factory in northern Israel will also close, the group said on its website.
The manufacturer claims its factory in the Jewish settlement of Mishor Adumim in the occupied West Bank, is a "model of integration" employing 500 Palestinians, 450 Arab Israelis and 350 Israeli Jews on the same salaries and with the same social security benefits.
Palestinian employees "receive salaries four or five times that of the average wage in the territories controlled by Palestinian authorities", it has said.
But the factory has been the focus of calls by Palestinian activists for a worldwide boycott of the firm.
The row hit the headlines in January when Johansson quit as an ambassador for charity Oxfam following a dispute over her ad campaign for SodaStream.
In one of the televised adverts, Johansson told audiences that they could drink SodaStream with a clear environmental conscience since the brand's plastic bottles are reused when making carbonated drinks at home.
The actress, who was at the time an ambassador for British charity Oxfam, came in for fierce criticism from the international BDS ("Boycott, divestment, sanctions") campaign that pushes for a ban on Israeli products for "profiting from occupation".
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A spokesman for Johansson said the star had parted company with Oxfam due to a "fundamental difference of opinion" over the boycott.
She still appears on the SodaStream website.
In an interview at the beginning of the year, SodaStream CEO Daniel Birnbaum acknowledged that Mishor Adumim, once a munitions factory, had become "a thorn in the side" of the company.
SodaStream made no reference to the Johansson controversy on Wednesday, saying instead that the closure of its largest plant would save $9 million (seven million euros) in production costs.
Its turnover was put at $125.9 million in the third quarter, down nine percent from 2013.
"We are launching a comprehensive growth plan to put the firm back on track," Birnbaum said.
SodaStream employs more than 2,000 people at more than 20 sites in Australia, China, Germany and South Africa, as well as in Israel and the occupied West Bank.
The group announced in 2012 it was to build a new factory in the Negev desert, in southern Israel.