The draw for the Under 20 FIFA World Cup scheduled to take place in Indonesia next week will be postponed, a source told Reuters after Bali's governor refused to host Israel's team.
The Indonesian Football Association PSSI said the draw that was to be held on Friday had been cancelled. FIFA is still in the process of checking tournament readiness.
The 24 team tournament is scheduled to be held from May 20 to Jun 11 across six cities and Israel was set to make their debut in the competition.
The Jakarta Post reported earlier this month that Bali's governor Wayan Koster had written to the Ministry of Youth and Sports asking them to adopt a policy forbidding the Israeli team from competing in Bali due to the conflict with Palestine.
The letter was sent to the PSSI. The USSI said that the presence of the Israeli national team in the FIFA U - 20 World Cup event was a reason for FIFA to cancel the U - 20 World Cup draw.
The governor's refusal is the same as the cancellation of the organising guarantee that was issued by the Bali provincial government. Earlier this month, protesters marched in the capital of Jakarta waving Indonesian and Palestinian flags while demanding Israel not be allowed to participate.
Indonesia's population is predominantly Muslim. In recent years Indonesian Muslims practice a moderate version of Islam, but have seen a rise in religious conservatism that has crept into politics.
Over the past year, Israeli forces have made thousands of arrests in the West Bank and killed more than 200 Palestinians, including fighters and civilians. More than 40 Israelis and three Ukrainians have died in the Palestinian attacks.
If Indonesia loses hosting rights, PSSI Executive Committee member Arya Sinulingga said he was worried about FIFA sanctions, but he said the PSSI hoped to find a solution where politics could be separated from sport, with chairman Erick Thohir set to coordinate with the Ministry of Foreign Affairs and the Ministry of Youth and Sports.
The chairman will report to Mr President at the first opportunity to find a solution to both diplomacy and foreign policy to save Indonesian football that we love, Sinulingga said.
The PSSI said losing hosting rights would harm Indonesian football teams' chances of taking part in other FIFA tournaments in the future, while the economic losses would amount to trillions of rupiah Indonesia is trying to rebuild its reputation after a deadly stampede last year led to the deaths of 135 spectators at a stadium in East Java in October. Many were crushed as they fled for exits after police fired tear gas into the crowd.