"Bahrain took the decision to end the boycott of Israeli goods because this is one of the conditions of the free trade agreement" with the United States, Bahrain's foreign minister, Sheikh Mohammed bin Mubarak Al Khalifa, told the independent Arabic newspaper, Alwasat, in an interview in New York on Friday.
The minister did not say when the boycott was repealed.
Foreign Ministry officials could not be reached on Friday, the weekend holiday in the kingdom.
The practical effects of the minister's statement remain to be seen.
It was also unclear whether Israeli business executives would be allowed to enter the kingdom.
The move makes Bahrain the first of the six Arab states of the Gulf to abolish its trade boycott of Israel, although others, such as Qatar and Oman, have taken limited steps in that direction.
Thaw in relations
The repeal coincides with signs of a thaw in relations between Israel and Arab and Muslim states following its withdrawal from the Gaza Strip.
"Bahrain took the decision to end the boycott of Israeli goods because this is one of the conditions of the free trade agreement"
Sheikh Mohammed bin Mubarak Al Khalifa,
Bahraini foreign minister
Earlier this month, Pakistani President Pervez Musharraf met Israeli Prime Minister Ariel Sharon in New York, and the Israeli foreign minister held talks with his Qatari and Tunisian counterparts on the margins of the UN summit there.
Only three Arab states have full diplomatic relations with Israel at present: Egypt, Jordan and Mauritania.
Bahrain, which hosts the base of the US Navy's 5th Fleet, signed the free trade deal with the United States last year, becoming the first Gulf state to do so.