The University of Oxford on Monday suspended Andrew Wilkie without pay for two months after he told Amit Duvshani there was "no way" he would accept someone who had served in the Israeli army.
It also ordered the pathology professor to undergo equal opportunities training.
"This ruling reflects that there can be no place for any form of discrimination within the University of Oxford other than on the grounds of merit," said a spokesman for the university.
"The decision follows an investigation... surrounding an e-mail which Professor Wilkie sent in response to an enquiry from an Israeli student regarding the possibility of graduate study in his research group," the spokesman said.
Wilkie, who resigned his fellowhip at Oxford's Pembroke College after the ruling, said he would welcome applications from able candidates, whatever their background, in the future.
Suspension is the most serious penalty that the university can impose, short of dismissal or removal from office.
British academics have increasingly taken action aimed at sending a strong political message to Israel that they disapprove of its oppression of the Palestinians.
In April 2002, Professor Muna Baker, from the UMIST Centre for Translation and Intercultural Studies in Manchester, caused a storm when she signed up to an academic boycott of Israeli institutions.
She removed two Israeli academics from the editorial boards of two periodicals.