The education ministry said Thursday that Israeli author Dorit Rabinyan's "Gader Haya" (translated as "Borderlife" in English) had been rejected for inclusion in school curriculums.
"Officials discussed the matter of including the book in the curriculum," the ministry said in a statement.
"After it seriously examined all the considerations, and weighed the advantages and drawbacks, they decided not to include the book in the curriculum."
The ministry provided no further details on the rejection of the book, which Israeli media reported had been recommended for inclusion by a ministry-backed committee.
But newspaper Haaretz quoted an education ministry official, Dalia Penig, saying one of the reasons for the exclusion was that the book could undermine the "separate identities" of Jews and Arabs.
"Intimate relations... between Jews and non-Jews -- are viewed by many in society as a threat to separate identities," she said.
That prompted objections from Israeli cultural figures, many of whom have long been at loggerheads with Prime Minister Benjamin Netanyahu, who formed a new rightwing government following his re-election in May.
Writing in Haaretz, commentator Alon Idan said the move was aimed at "protecting the purity of Jewish blood" and reflected "institutionalised race theory".
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"'Intimate relations' = sex. 'Non-Jews' = Arabs,'" Idan wrote. "Now we can reread her words in their simpler form: Jews and Arabs are forbidden to have sex with one another."
"Gader Haya", published in 2014, tells the story of an Israeli translator and a Palestinian artist who fall in love in New York but later part ways as she returns to the Israeli city of Tel Aviv and he to Ramallah in the occupied West Bank.
It was among the winners of the Bernstein Prize for young writers -- an annual Israeli award for Hebrew literature.
After requests to include it from a number of teachers, a committee initially backed its addition to the curriculum but was later overruled by two senior ministry officials, Haaretz said.
Author Rabinyan, quoted in the Israeli media, sarcastically pointed to the positives to draw from the ruling.
"It looks like someone in the education ministry still believes in the power of literature to generate change in the malleable souls of youths, and for some reason, that sounds optimistic to me."
The left-wing Meretz party called for a demonstration outside the education ministry over the disqualification, the latest in a series of disputes between the government and cultural figures.
In June Education Minister Naftali Bennett, leader of the rightwing Jewish Home party, pulled state funding from an Arab play which he alleged showed a Palestinian attacker in a sympathetic light.
The country's most famous living author, Amos Oz, declared in November he will not attend events at Israeli embassies across the globe due to the government's "radical" policies.