By officially declaring the Islamic State illegal, Israel will now be able to take legal action against anyone raising funds or associating with the terror organisation in any way.
"This is necessary for the purposes of protecting state security, public welfare and public order," Defence Minister Moshe Ya'alon said in a declaration signed yesterday to ban the outfit.
The declaration bans the Islamic State's various names in any form and goes on to list several of its Arabic, Hebrew and English titles.
An IS video posted online two weeks ago showed the killing of another US journalist, James Foley.
The Islamic State has thrived and mutated during the civil war in Syria. It swept into Iraq in June, seizing large swaths of the country's Sunni-dominated northern and western provinces.
The defence minister also signed another declaration that outlaws the Abdullah al-Azzam Brigades, a Sunni jihadist group linked to al-Qaida which has in the past claimed responsibility for launching rockets into Israel.