The incident took place just north of the Red Sea resort city of Eilat and 500 metres (yards) from the border with Jordan.
The spill was "a couple of kilometres long", according to an Israeli environment ministry spokeswoman.
Gilad Golub of Israel's Environmental Services Company told AFP that 1,000 cubic metres -- the equivalent of 40 tanker trucks -- of oil had been spilled.
Golub said the environmental damage could be serious, pointing out that the spill occurred in an area that is a protected nature reserve.
He said it could take several weeks to clear all traces of the oil, and months to ensure that it had not seeped underground.
"We do not suspect an act of sabotage," he added, saying it appeared a vehicle had hit part of the pipeline, causing the leak.
Signup to our newsletter and follow us on Facebook and Twitter!
Jordanian authorities said dozens of people there had sought medical treatment because of the fumes.
But the gas was not poisonous and most of the cases seen by hospitals were the result of "panic and fear caused by the strange smell," the civil defence department said in a statement.
The leak involved a 245 kilometre (152 mile) pipeline carrying crude oil from the southern port city of Ashkelon on Israel's Mediterranean coast to Eilat.
Ronen Moshe, spokesman for the Eilat Ashkelon Pipeline Company (EAPC), said the spill happened at 8:45pm (1845 GMT) on Wednesday in a new section of the pipeline.
"The leak has been stopped," he said.
"There are dozens of people in the field taking care of the aftermath," he said.
According to the company's website, the EAPC was founded in 1968 and serves as a land bridge for transporting crude oil between the Red Sea and the Mediterranean.