German Chancellor Angela Merkel has decided to cancel the annual government-to-government meeting with Israel, scheduled for May 9.
A German spokesman said the governments had agreed to "postpone" the annual meeting of leaders and ministers until next year, blaming the delay on the busy schedule of meetings surrounding Germany's presidency of the G20.
An Israeli Foreign Ministry spokesman confirmed the session has been called off, citing "schedule constraints on the German side."
Officials in Jerusalem believe the cancelation was due to anger in Berlin over the passing of the Regulation Law, while German officials suggested the real reason for the cancelation was the feeling that the two governments were too far apart on the issue of Middle East peace to make such a meeting worthwhile.
"Our relations have been completely pared back," one senior German official said. "We have practically given up on making progress in the current environment."
This would have been the seventh annual government-to-government (G2G) meeting between Israel and Germany.
German governments have made strong relations with Israel a top priority ever since World War Two, going to great lengths to make amends for the Holocaust.
But relations have grown tense in recent years as Germany questioned Prime Minister Benjamin Netanyahu's commitment to a two-state solution with the Palestinians.
The election of US President Donald Trump appears to have emboldened Netanyahu to step up building in settlements, which are seen by Germany and many other countries as illegal and an obstacle to peace because they reduce and fragment the territory Palestinians need for a viable state.
Israel has built about 120 settlements in the West Bank. About 350,000 settlers live there, with a further 200,000 in East Jerusalem.
Since Trump took office last month, Netanyahu has approved construction of 6,000 settler homes in the two areas, drawing international condemnation which the White House did not join.
The Regulation Law, which passed in the Knesset earlier this month, retroactively legalizes government-backed Jewish outposts in the West Bank built on privately-owned Palestinian land.
The law was widely condemned by the international community as well as the Palestinians.
"This law crosses a new and dangerous threshold by legalizing under Israeli law the seizure of Palestinian property rights and effectively authorizing the confiscation of privately owned Palestinian land in occupied territory," the European Union's foreign affairs representative Federica Mogherini said in a statement.
In an apparent response to the passing of the legislation, the EU postponed a summit between its representatives and Israel, scheduled for February 28 in Brussels.