The Co-operative Group said in a statement it was "no longer engaging with any supplier of produce known to be source[d] from Israeli settlements," the British daily The Observer reported Sunday.
Palestinian human rights campaigners welcomed the decision, saying it was the first time a supermarket anywhere in the West took such a position, the daily said.
The Co-operative Group "has taken the lead internationally in this historic decision to hold corporations to account for complicity in Israel's violations of Palestinian human rights," Hillary Smith, a campaigner coordinator for the Boycott Israel Network, told the newspaper.
The decision will affect four Israeli companies and contracts worth about $569,000, the newspaper said. The four Israeli companies are Agrexco, Arava Export Growers, Adafresh and Mehadrin, Israel's largest agricultural export company.
The Co-operative Group said it did not view the decision as a boycott of Israeli goods, and said contracts will go to other Israeli companies that can guarantee they won't export produce from illegal settlements, the newspaper said.