Israel has also blocked the entry of medical, food and fuel supplies into Gaza since the start of March, prompting international experts to warn of looming famine, although some trucks were allowed to enter on Monday.
Foreign minister David Lammy said the offensive was "a dark new phase in this conflict", called for Israel to end the blockade of aid and condemned comments by finance minister Bezalel Smotrich on the possible cleansing and destruction of Gaza and relocation of its residents to third countries.
"It is extremism. It is dangerous. It is repellent. It is monstrous, and I condemn it in the strongest possible terms," a visibly angry Lammy told lawmakers, adding the operation in Gaza was "incompatible with the principles that underpin our bilateral relationship".
"Today, I'm announcing that we have suspended negotiations with this Israeli government on a new free trade agreement."
Israel said Britain had not advanced the trade talks, which started formally in 2022 under a previous Conservative British government, for some time.
"The British Mandate ended exactly 77 years ago," a spokesperson for its foreign ministry said. "External pressure will not divert Israel from its path in defending its existence and security against enemies who seek its destruction."