The decision comes after Australia's decision to recognise the state of Palestine and its refusal of entry to significant Israeli figures.
The diplomats were tasked with helping Australia engage with the Palestinian Authority as the federal government's recognition of Palestine is tied to commitments made by the body, including an assurance that designated terror group Hamas play no role in a future state.
Though they have not been working in Gaza, the diplomats had liaised with humanitarian organisations which have been trying to get aid into the territory.
In a social media post on Monday, Israel's Foreign Minister Gideon Sa'ar said he had also instructed the Israeli Embassy in Canberra to carefully examine any official Australian visa application for entry into Israel.
The move followed Australia denying far-right Israeli politician Simcha Rothman entry into the country for a speaking tour after provocative comments, including branding children in Gaza as enemies.
Foreign Minister Penny Wong said the government had a right to safeguard communities and protect "all Australians from hate and harm".
"At a time when dialogue and diplomacy are needed more than ever, the Netanyahu government is isolating Israel and undermining international efforts towards peace and a two-state solution," Senator Wong said on Tuesday.
"This is an unjustified reaction following Australia's decision to recognise Palestine."
She said Australia would continue to contribute to "international momentum to a two-state solution, a ceasefire in Gaza and release of the hostages" and would always take decisive action against anti-Semitism.
The Palestinian Authority's Ministry of Foreign Affairs also condemned Israel's "arbitrary" cancellations.
It stressed it would continue to deal with the Australian diplomats, saying Israel had no legal basis to block citizens of a third nation from entering Palestinian territory.
Earlier in August, Prime Minister Anthony Albanese confirmed Australia's intention to recognise Palestinian statehood at the United Nations General Assembly meeting in September.
The decision came after more than 100,000 people marched across the Sydney Harbour Bridge to protest the war in Gaza.
Mr Sa'ar accused the Australian government of fuelling anti-Semitism as he announced the visa cancellations on social media on Monday.
"This follows Australia's decisions to recognise a 'Palestinian state' and against the backdrop of Australia's unjustified refusal to grant visas to a number of Israeli figures, including former minister Ayelet Shaked and ... (Member of the Knesset) Simcha Rothman," Mr Sa'ar posted on X.
Opposition Leader Sussan Ley said she regretted the way the relationship between the Australian and Israeli governments was deteriorating.
"That is something all Australians should be very sad about today," she told reporters in Sydney.
Australia should be supporting Israel as a "liberal democracy" but had not demonstrated that in recent weeks, Ms Ley said, calling on Home Affairs Minister Tony Burke to explain his decision to reject Mr Rothman's visa.
The Australia/Israel and Jewish Affairs Council also called the move "deeply troubling".
"It is very disappointing that Australia and Israel have regressed from a close friendship to unproductive diplomatic jousting, which of course was started by unwarranted and hostile actions by the Australian Government," the council said in a statement.
Australia has also denied entry to former Israeli minister Ayelet Shaked, based on anti-Palestinian comments, and Israeli advocate Hillel Fuld.
Canberra has further imposed sanctions on two far-right Israeli ministers, including travel bans.
The federal government has denied entry to people who have a history of anti-Semitism, including rapper Kanye West after he released a song praising Hitler, as well as Lebanese pro-Hezbollah influencer Hussain Makke.
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