Boycotts of Israeli goods because of settlement building, pictured, will be banned under new rules

Universities and councils have been told boycotting Israeli goods 'undermines national security'.

Cabinet Office Minister Matthew Hancock is due to formally announce the new government policy on a visit to Israel, insisting product bans fuel anti-Semitism.

But the move was immediately criticised by Labour leader Jeremy Corbyn as an 'attack on local democracy'.

Under the plans, all publicly-funded organisations would lose the freedom to refuse to purchase from companies involved in the arms trade, fossil fuels, tobacco products or Israeli settlements in the occupied West Bank.

In 2014 Leicester City Council agreed a ban on goods produced in Israeli West Bank settlements.

The Scottish Government 'strongly discourages' local authorities from trading with companies operating 'illegal settlements'.

It is unclear whether the new rules will be imposed on student unions as government sources told The Independent, which revealed the policy today, this was a 'grey area'.

But Mr Hancock said: 'We need to challenge and prevent these divisive town-hall boycotts.

'The new guidance on procurement combined with changes we are making to how pension pots can be invested will help prevent damaging and counter-productive local foreign policies undermining our national security.'

'Severe penalties' such as large fines will be imposed if the new rules are breached but it will not be a criminal law matter.

Cabinet Office Minister Matt Hancock said 'divisive' boycotts of Israeli goods had to be challenged

A spokesman for the Labour leader Mr Corbyn said: 'The Government's decision to ban councils and other public bodies from divesting from trade or investments they regard as unethical is an attack on local democracy.

'People have the right to elect local representatives able to make decisions free of central government political control.

'That includes withdrawal of investments or procurement on ethical and human rights grounds.

'This Government's ban would have outlawed council action against apartheid South Africa.

'Ministers talk about devolution, but in practice they're imposing Conservative Party policies on elected local councils across the board.'

Hugh Lanning, chairman of the Palestine Solidarity Campaign, told The Independent: 'As if it is not enough that the UK Government has failed to act when the Israeli government has bombed and killed thousands of Palestinian civilians and stolen their homes and land, the Government is now trying to impose its inaction on all other public bodies.'