"We have no intention of obeying this law, and we're going to campaign against it because anyone who buys products made in settlements is contributing to the continuation of the occupation," Peace Now's Hagit Ofran told AFP.
The law passed Israel's 120-seat Knesset late Monday night, after hours of passionate debate in which right-wing and opposition lawmakers traded barbs. Many lawmakers, including much of Prime Minister Benjamin Netanyahu's cabinet, chose to skip the vote, with the law eventually passing by 47-38.
The legislation effectively bans any call for the boycott of people, products or organisations linked to "the state of Israel, one of its institutions, or an area under its control."
The law allows any individual or institution claiming economic, cultural or academic damage as a result of the boycott to sue the person or group who called for the boycott.
It does not require the petitioner to prove the damage was caused, but only that the damage could reasonably have been expected as a result of the boycott call.
Organisations found to have supported boycotts are liable to lose their tax-exempt status, a measure that non-governmental groups say targeted them.
Peace Now immediately set up a Facebook group challenging the law under the title "Prosecute me, I boycott the settlements!," which attracted more than 2,000 supporters by Tuesday morning.