The residents of the Wadi Ara region (in the north of Israel) should be boycotted as they "do not belong to the state of Israel," Lieberman told Army Radio.
"They should understand that they are not wanted here, they are not part of us" and according to the defence minister they "have no connection to this country".
"What is happening in Wadi Ara is intolerable," he said adding, "So I am calling for a boycott of Wadi Ara. Don't go there and don't buy there. They need to understand that it is impossible to demonstrate with Hezbollah flags, Palestinian flags and pictures of (Hezbollah leader Hassan) Nasrallah. To accept billions from the National Insurance (Institute) and to also destroy us from within".
Police arrested two residents of Arara, one a minor and the other an adult, on suspicions of throwing rocks at cars.
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When asked by the interviewer whether he was making generalisations about all the Arab residents of the area, Lieberman stressed, "It seems you don't live in Israel. I saw thousands at that funeral of the terrorists in Umm al-Fahm. It was thousands, and I heard those sermons in the mosques, in all of them, sermons of incitement by those so-called spiritual leaders".
He later repeated his call for a boycott of businesses in Wadi Ara.
The Head of the Arab Joint List in the Knesset (Israeli parliament), Ayman Odeh, reacted angrily saying the minister is "a representative of the dark fascist regime of (Prime Minister Benjamin) Netanyahu's extreme right-wing government".
"The call to boycott citizens just because of their national and religious origin reminds one of the darkest regimes in human history. The thought that such a person is responsible for the security of the country should worry every rational citizen," Odeh added.