The official Bolivian news agency, ABI, said the socialist leader also called on other countries to show similar solidarity with Palestinians in Gaza, the Latin American Herald Tribune reported.
"Bolivia had diplomatic relations with Israel, but in the face of of these acts of grave attacks against life, against humanity, Bolivia breaks diplomatic relations with Israel," Morales said at a reception for the diplomatic corps at the presidential palace in La Paz.
"The crimes of the government of Israel damage stability and global peace and have brought the world back to the worst stage of crimes against humanity that have not been seen except during World War II and, in recent years, in the former Yugoslavia and Rwanda."
Morales's action mirrors follows last week's decision by Venezuelan President Hugo Chavez to expel Israel's ambassador in Caracas.
The only other country so far to sever diplomatic relations with Israel is Mauritania in Africa. Mauritania was one of only three Arab league members to have formal relations with Israel, the Herald Tribune noted.