The government said on Thursday that there were "very strong reasons" to suspect the two men were acting on behalf of Israel's intelligence services and froze all high-level official contact with Israel.
Clark said she would stop a planned visit by Israeli President Moshe Katsav in August. She also said Israeli officials would need visas to enter New Zealand and foreign ministry contacts would be suspended.
In an angry statement issued after an Auckland High Court on Thursday jailed the two men, Clark said that their actions had amounted to a breach of New Zealand's sovereignty.
"The New Zealand government views the act carried out by the Israeli intelligence agents as not only utterly unacceptable but also a breach of New Zealand sovereignty and international law," she said.
"The Israeli government was asked for an explanation and an apology three months ago. Neither has been received," she added in the statement.
Clark pointed out that it was not the first time Israel had sought fraudulently to obtain passports from another country.
"Israeli agents caught in an unsuccessful assassination attempt in Jordan in 1997 were found to be carrying fraudulent Canadian passports," she said.
A New Zealand court sentenced Uriel Zoshe Kelman and Eli Cara to six months in prison after they pleaded guilty to trying to obtain fraudulently a New Zealand passport by assuming the identity of a wheelchair-bound cerebral palsy victim.
Some previous international scandals involving Mossad and other Israeli intelligence agencies:
* 1954 - Egypt cracks Israeli Military Intelligence cell of
Egyptian Jews who firebombed sites frequented by Westerners to embarrass Cairo and stop it nationalising the Suez Canal.
Defence Minister Pinhas Lavon quits, though denies authorising
* 1985 - US Navy analyst Jonathan Pollard is arrested for
passing intelligence to Lakam, an Israeli agency specialising
in scientific cooperation. Israel apologises to Washington and dismantles Lakam. Pollard is sentenced to life in prison.
* 1991 - Four Israelis, widely reported to be Mossad agents, are arrested during apparent attempt to bug Iranian embassy in Cyprus. They are released for lack of evidence.
* 1997 - Two Mossad assassins are captured by Jordanian
authorities after a failed attempt to kill Khaled Meshaal, a Hamas leader. They are sent home after Israel frees late jailed Hamas founder Shaikh Ahmad Yassin.
* 1998 - A group of Israelis is discovered trying to tap
the phones of a suspected Lebanese Hizb Allah activist in
Switzerland. In a closed-door trial, one Israeli, described in
the media as a Mossad agent, is fined and given a suspended
jail sentence. His three accomplices are released.
*In Cyprus, two suspected Mossad agents are arrested and
charged with spying on sensitive military installations. They
are released after nine months in prison under a plea bargain.
They were let off from serving a further three months after offering to donate NZ$50,000 ($32,700) each to a local charity. The pair had faced a maximum penalty of five years in jail.
Kelman shielded his face with a hand to avoid being filmed throughout the two-and-a-half hour sentencing.
Clark said New Zealand would not accept any attempt by the Israeli government to intervene on behalf of the men and that Cara and Kelman would serve their sentences in full and then be deported.
Israel's acting ambassador in Australia, Orma Sagiv, said she hoped Israel's strong relationship with New Zealand would not see long-term damage from the incident.
Sagiv declined to comment on whether the men were intelligence agents or on the diplomatic sanctions. Israel has no direct diplomatic representation in New Zealand.
The two men were arrested in March after police secretly followed them as they were arranging to pick up the passport.
A third man, identified as Zev William Barkan, was said by the defence to have masterminded the operation, but he left New Zealand before he could be arrested.