The Tricycle theatre in London is facing criticism after its refusal to host the UK Jewish Film Festival while it is partially funded by the Israeli embassy.

The Kilburn venue, which has hosted the festival for the past eight years, had been due to screen 26 films as part of the event in November.

However, Indhu Rubasingham, artistic director of the Tricycle, said due to the sensitivity of the ongoing Israeli-Palestine conflict, the theatre's board had taken the decision not to host the festival under its current sponsorship arrangement.

She said: "The festival receives funding from the Israeli embassy and, given the current conflict in Israel and Gaza, we feel it is inappropriate to accept financial support from any government agency involved.

"We offered to provide alternative funding to cover the loss of the contribution from the Israeli embassy. We want the festival. However, the UKJFF decided it was not willing to decline sponsorship from the Israeli embassy and, to our regret, withdrew the festival from the Tricycle."

She added: "To be clear, at this moment, the Tricycle would not accept sponsorship from any government agency involved in the conflict. We hope to find a way to work with the UK Jewish Film Festival to allow the festival to go ahead at the Tricycle as it has done so successfully for the past eight years."

Echoing her comments, in a written explanation outlining their board's decision, Jonathan Levy, chairman of the Tricycle, added: "Given the present situation in Israel/Palestine, and the unforeseen and unhappy escalation that has occurred over the past three weeks, including a terrible loss of life, the Tricycle cannot be associated with any activity directly funded or supported by any party to the conflict… The Tricycle will be pleased to host the UKJFF provided that it occurs without the support or other endorsement from the Israeli government."

The Jewish Film Festival's organisers expressed their surprise and disappointment at the Tricycle's decision to boycott just weeks before the schedule was finalised.

Judy Ironside, founder and executive director of the UK Jewish Film Festival, said that "the Tricycle theatre have shown themselves unwilling to work with what is clearly an apolitical cultural festival is tremendously disappointing. They have chosen a boycott over meaningful engagement – to the great detriment of this celebration of Jewish culture, which is of course intrinsically connected to the state of Israel".

She continued: "We pride ourselves on showing a diverse programme of films, which present a comprehensive view of international Jewish life and Israeli films are of course an important part of that.

"We have always sought to convey a wide perspective on the conflicts in the Middle East and initiate open dialogue with our audiences and guest speakers; and the Israeli Embassy have always supported us in this. The Tricycle have refused to take this into account in their decision."

The festival counts a range of high profile organisations among its sponsors and patrons, including Sky, the National Lottery film fund and the Swedish embassy.

In its mission statement, the festival states: "We aim to develop a culture where Jewish and Israeli film is recognized and enjoyed by the widest possible audience, and position Jewish-related film at the heart of British culture. Our work encourages pride of, and knowledge in, our Jewish culture amongst our younger generations and promotes understanding and awareness towards Jewish and Israeli people and culture."

The Tricycle's decision to boycott the festival prompted outrage from figures in the theatre community and on social media, with many accusing the venue of anti-semitism.

British actor Maureen Lipman expressed her anger in a statement, saying: "The Tricycle theatre under Nick Kent had a stunning history of truthful story telling. A great part of its support and its audiences came from the Jewish sector. We always knew that even if we disagreed with the message, we accepted that it came from a reasoned and balanced argument. Today that ceased. The Tricycle have decided to punish Jewish people in the Diaspora for one view of what is taking place in the Middle East and that is quite unacceptable."

She was followed by author David Winner, who tweeted: "Disgusted beyond words by naked antisemitism at the @tricycletheatre. If the Tricycle boycotts Jews, Jews should boycott the Tricycle."

Stephen Pollard, editor of the Jewish Chronicle, stated similar views, writing: "Be clear on this. @tricycletheatre is now officially antisemitic. It is singling out the Jewish state for boycott."

However, others within the arts industry voiced their support for the Tricycle's position. Lenny Abrahamson, acclaimed director of What Richard Did and Frank, said: "As a filmmaker of Jewish background I fully support the Tricycle's position."

And Nicholas Hytner, director of the National Theatre, said he supported the Tricycle's decision. He said: "I greatly regret the UKJFF's decision to leave the Tricycle cinema. Indhu Rubasingham and the Tricycle board could not have made clearer their commitment to Jewish culture or their desire to host a festival that would have included films from all over the world, including Israel. It is entirely understandable that they felt obliged to insist that no government agency should sponsor the festival.

"The Tricycle serves a diverse community with a notably diverse repertoire and it has a clear responsibility to make no statement about the dispute that is behind the current conflict. It greatly saddens me that the UKJFF have unwisely politicised a celebration of Jewish culture and I deplore any misrepresentation of the Tricycle's position. I support Indhu Rubasingham and the Tricycle without reservation."

• This article was amended on 6 August 2014 to clarify the circumstances in which the festival will no longer be hosted by the Tricycle.