Prime Minister Benjamin Netanyahu, "ordered suspension of diplomatic contacts with the institutions of the European Union and its representatives on this issue," the foreign ministry said in a Hebrew-language statement.
It said the ban would be in force for the duration of a reassessment of the bloc's role in peace efforts.
But it went on to say that Israel would continue business as usual with national officials of European member states.
"It is important to make clear that Israel is maintaining diplomatic talks with individual European states -- such as Germany, Britain and France -- but not with the institutions of the European Union," it said.
Netanyahu flies to Paris on Monday, where he will meet French President Francois Hollande, among other leaders, on the fringes of the UN climate conference.
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Palestine Liberation Organisation official Saeb Erekat said the latest Israeli move was an attempt to coerce the EU into a U-turn on the labelling issue.
"Israel already stopped the peace process," he said. "The EU is our partner and we respect them."
The statement said Netanyahu, who is also foreign minister, ordered the freeze in answer to the EU's November 11 decision to label settlement produce imported to Europe as such rather than "Made in Israel".
The same day, Israel said it was suspending various scheduled EU meetings in response to the labelling move, which it harshly condemned.
US-backed peace talks between the Palestinians and Israel collapsed in April 2014 after nine months of fruitless meetings amid bitter recriminations and mutual blame.
US Secretary of State John Kerry met Netanyahu and Palestinian president Mahmud Abbas on Tuesday in Jerusalem and Ramallah but he left without a breakthrough and said he would continue to press both leaders on the issue in coming weeks.