Bahrain, the United Arab Emirates, Yemen and the Maldives joined Saudi Arabia and Egypt in severing relations with gas-rich Qatar, with Riyadh accusing Doha of supporting groups, including some backed by Iran, "that aim to destabilise the region".
Qatar reacted with fury, denying any support for extremists and accusing its Gulf neighbours of seeking to put the country under "guardianship".
The crisis was likely to have wide-ranging consequences, for Qatar and its citizens as well as the Middle East and Western interests.
Qatar hosts the largest US airbase in the region, which is crucial to the fight against Islamic State group jihadists, and is set to host the 2022 football World Cup.
Monday's announcement came less than a month after US President Donald Trump visited Saudi Arabia to cement ties with Riyadh and called for a united front among Muslim countries against extremism.
It also followed weeks of rising tensions between Doha and its neighbours, including Qatari accusations of a concerted media campaign against it and the alleged hacking of the Qatar News Agency.
- Qatar slams 'baseless claims' -
The Gulf states and Egypt said they were severing diplomatic ties and closing transport links with Qatar, which relies on imports from its neighbours.
The Gulf states banned their citizens from travelling to Qatar and ordered Qatari citizens to leave within 14 days.
Saudi Arabia also closed its borders with Qatar, effectively blocking food and other supplies exported by land to Qatar -- prompting panicked shoppers to flood supermarkets in Doha.
In one of the largest supermarkets there were queues up to 25-people deep as shoppers piled trollies and baskets high with supplies from rice to nappies.
"It's a cycle of panic and I needed to get pasta," said Ernest, from Lebanon, as he shopped with his family -- pushing not one but two trollies.
The Qatar Stock Exchange tumbled eight percent on opening and eventually closed down 7.58 percent.
Riyadh said its measures were the result of "gross violations committed by authorities in Qatar", accusing Doha of harbouring "terrorist and sectarian groups that aim to destabilise the region including the Muslim Brotherhood, Daesh (IS) and Al-Qaeda".
Gulf states have for years accused Qatar of supporting extremist groups, in particular the Muslim Brotherhood, the world's oldest Islamist organisation.
Riyadh also accused Doha of supporting Iran-backed "terrorist activities" in Saudi Arabia's Shiite-dominated area of Qatif, as well as in Bahrain, both of which have seen Shiite unrest in recent years.
Saudi Arabia also shut the office of Qatar's Al-Jazeera global news channel in Riyadh, accusing it of promoting "terrorist groups", while in the UAE a subsidiary satellite network, beIn Sports, went offline.
Any suggestion that Qatar is backing the agenda of Shiite-dominated Iran -- Sunni Saudi Arabia's regional arch-rival -- is especially sensitive, particularly after Trump's comments last month.
"The measures are unjustified and are based on false and baseless claims," the Qatari government said.
"The aim is clear, and it is to impose guardianship on the state," it said, insisting authorities would "take all measures necessary... to foil attempts to affect or harm Qatar's society and economy".
- Flights cancelled -
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Economic consequences were already emerging, with UAE carriers Emirates, Etihad, flydubai and Air Arabia, as well as Saudi Airlines, announcing the suspension of all flights to and from Qatar as of Tuesday morning.
Egypt said it would also suspend air links with Qatar from Tuesday and gave Doha's ambassador 48 hours to leave the country.
Qatar Airways said it had suspended all flights to Saudi Arabia with immediate effect, at least until the end of Monday.
The airline -- one of the region's busiest -- also faced major potential problems after Saudi civil aviation authorities said the country's airspace would be closed to Qatari planes.
The Saudi-led coalition battling Iran-backed rebels in Yemen said it had expelled Qatar from the group.
The coalition accused Qatar of providing "support to (terrorist) organisations in Yemen" -- the first time it has made such a claim.
Gulf countries previously recalled their ambassadors from Qatar in 2014, ostensibly over its support for the Brotherhood, but Monday's moves go much further.
Saudi Arabia and its Gulf allies may have felt emboldened by Trump's visit, which saw the new president clearly align US interests with Riyadh and lash out at Iran.
US Secretary of State Rex Tillerson said he did not expect the announcement to have "any significant impact... on the unified fight against terrorism."
He encouraged Qatar and its neighbours to "sit down together", adding that Washington was ready for "any role that we can play" in helping to overcome divisions.
Iran also urged Qatar and its neighbours to talk.
"Neighbours are permanent; geography can't be changed. Coercion is never the solution. Dialogue is imperative, especially during blessed Ramadan," Foreign Minister Mohammad Javad Zarif tweeted, referring to the Muslim month of fasting.
Zarif later spoke on the phone with his counterpart in Qatar, but also the foreign ministers of Algeria, Indonesia, Iraq, Lebanon, Malaysia, Oman, Tunisia and Turkey to discuss the "latest regional developments".
Israeli Defence Minister Avigdor Lieberman told his country's parliament the latest developments involving Qatar could herald a broad anti-terror alliance including Israel.
- 'Unprecedented tensions' -
Early signs of an impending crisis emerged last month.
Doha said hackers were behind the release of false remarks attributed to Emir Sheikh Tamim bin Hamad Al-Thani published on the website of its national news agency.
The stories quoted him questioning US hostility towards Iran, speaking of "tensions" between Doha and Washington and speculating that Trump might not remain in power for long.
Doha denied the comments and denounced a "shameful cybercrime".
The crisis is the worst to hit Gulf Arab nations since the creation in 1981 of the Gulf Cooperation Council (GCC) grouping Saudi Arabia, Bahrain, the UAE, Kuwait, Oman and Qatar.
There was no immediate word from Kuwait and Oman on Monday on their ties with Qatar.
Last week, the Qatari emir travelled to Kuwait to meet Emir Sheikh Sabah al-Ahmad Al-Sabah in what was widely seen as an attempt at mediation by the Kuwaitis.
"This certainly represents an unprecedented uptick in tensions within the GCC," said Adam Baron, visiting fellow at the European Council on Foreign Relations.
"Qatar has long had an independent streak that's led to resentment from its neighbours."