The draw for the Under-20 Fifa World Cup that was scheduled to take place in Indonesia next week will be postponed, a source told Reuters after Bali's governor refused to host Israel's team.
The Indonesian Football Association (PSSI) said the draw that was to be held on Friday had been cancelled. Fifa were still conducting checks on tournament readiness.
The 24-team tournament is scheduled to be held from May 20 to June 11 across six cities and Israel were set to make their debut in the competition.
The Jakarta Post reported earlier this month that Bali's governor Wayan Koster had written to the youth and sports ministry imploring them to "adopt a policy forbidding the Israeli team from competing in Bali" due to the conflict with Palestine.
The letter was also sent to the PSSI. Reuters could not reach the governor's office for comment. Reuters has also contacted the Israeli FA for comment.
"Previously, Bali governor Wayan Koster rejected the presence of the Israeli national team in the Fifa U-20 World Cup event... This can be a reason for Fifa to cancel the U-20 World Cup draw," the PSSI said in a statement.
"Because, for Fifa, the governor's refusal is the same as cancelling the organising guarantee that has been issued by the Bali provincial government."
Earlier this month, protesters marched in the capital of Jakarta waving Indonesian and Palestinian flags while demanding Israel not be allowed to participate.
Indonesia's population is predominantly Muslim. Most Indonesian Muslims practice a moderate version of Islam, but recent years have seen a rise in religious conservatism that has crept into politics.
Over the past year, Israeli forces have made thousands of arrests in the West Bank and killed more than 200 Palestinians, including fighters and civilians. Meanwhile, more than 40 Israelis and three Ukrainians have died in Palestinian attacks.
If Indonesia lose hosting rights as a result, PSSI executive committee member Arya Sinulingga said he was worried about how Fifa sanctions could "isolate Indonesian football from the world".
Indonesia automatically qualified for the Under-20 World Cup as hosts but the last time they played in the tournament was in 1979.
Indonesia were also suspended by Fifa for nearly a year for government interference, with the global football body lifting the suspension in May 2016.
But at the time, the suspension had denied Indonesian teams the chance to qualify for upcoming major tournaments.
Sinulingga said the PSSI hoped for a solution where politics could be separated from sport, with its chairman Erick Thohir set to coordinate with the foreign ministry and the youth and sports ministry.
"The chairman will also report to Mr President at the first opportunity to find a solution to all this, both diplomacy and foreign policy... to save Indonesian football that we love," Sinulingga added.
The PSSI said losing hosting rights would harm Indonesian football teams' chances of taking part in other Fifa tournaments in the future while the economic losses would amount to "trillions of rupiah".
Indonesia is also trying to rebuild its reputation after a deadly stampede last year led to the deaths of 135 spectators at a stadium in East Java in October. Many were crushed as they fled for exits after police fired tear gas into the crowd.