The Israeli embassy in Argentina on Tuesday announced the "suspension" of Saturday's match with its national team, citing what it called "threats and provocations" against Barcelona superstar Lionel Messi.
The sold-out game in Jerusalem was hotly opposed by Palestinians, who claim the eastern part of the city, annexed by Israel, as the capital of their future state.
The status of the holy city has come even more sharply into focus since US President Donald Trump recognised it as Israel's capital. Israel considers Jerusalem its "indivisible" capital.
"It's a shame that Argentina's footballing nobility did not withstand the pressure from Israeli-hating inciters," Israeli Defence Minister Avigdor Lieberman wrote on Twitter Wednesday.
He said the sole aim of opponents of the Jerusalem game was "to strike at our basic right to self-defence and to bring about the destruction of Israel".
The Palestinian Football Association -- which had urged Messi not to take part -- welcomed the scrapping of the game, insisting sport should not "be a tool for politicians and for political extortion".
"What happened...is a red card from everybody to the Israelis," association boss Jibril Rajoub said at a press conference, sitting next to a sign reading "From Palestine thank you Messi".
Israeli media said that late Tuesday Prime Minister Benjamin Netanyahu called Argentine President Mauricio Macri, with whom he has good relations, in an effort to save the match but that Macri had said he was unable to intervene.
Netanyahu is currently visiting Europe and his office could not immediately confirm the reports.
Israeli daily Yisrael Hayom, considered close to Netanyahu, expressed ire with its front-page headline: "They surrendered to terrorism: The game against Argentina has been cancelled."
Argentina team 'not willing'
Argentine Foreign Minister Jorge Faurie said before confirmation of the game's cancellation that he believed his country's players had been reluctant to travel to Israel for the match.
"As far as I know, the players of the national team were not willing to play the game," Faurie said.
The status of Jerusalem, always a key sticking point in the Israeli-Palestinian dispute, surged back to centre-stage when Trump tore up decades of US policy to recognise it as Israel's capital in December.
The US shifted its Israeli embassy to Jerusalem in May on the 70th anniversary of the creation of Israel in a move met with condemnation from the Palestinians.
At the same time, Israel has faced fierce criticism over its use of of lethal force against Palestinian protesters on the Gaza Strip border with the Jewish state.
Israeli troops have shot dead at least 125 Gazans since March 30, during protests and clashes along the border over the return of Palestinians to land they fled or were expelled from during the 1948 war surrounding Israel's creation.
The international friendly on Saturday was initially meant to be played in the city of Haifa, but was shifted to Jerusalem, fuelling Palestinian opposition.
The press in Argentina and Israel reported that the Argentine Football Association (AFA) was supposed to receive a payment of between two and three million dollars if Messi played.
The Palestinian FA's Rajoub had urged Messi not take part and called on fans to burn shirts bearing his name if he did.
Rajoub said he had written to Argentina's government asking that Messi not play and accused Israel of trying to give the game "political significance by insisting it be held in Jerusalem".
Argentina coach Jorge Sampaoli last week aired misgivings about having his players make the trip to Israel, noting he preferred to remain in Barcelona, where the team is holding its pre-World Cup training camp.
"From a sporting point of view, I would have preferred to play in Barcelona," Sampaoli said.
The World Cup kicks off in Russia on June 14, with Messi looking to inspire Argentina to victory. Israel's national team has not qualified for the tournament.