The Rachel Corrie aid ship on Saturday ignored a navy military order to stop and pressed on towards Gaza, despite fears of a confrontation with Israeli warships.
The latest confrontation comes just five days after Israeli naval commandos boarded another aid ship in a deadly raid which left nine activists dead, most of them Turkish.
"We indicated several times to the organisers aboard the ship that they should head to the port of Ashdod as there is a blockade in force on the Gaza Strip, but they ignored our appeals and are continuing to head towards Gaza," a military spokeswoman said.
Earlier, a spokesman for the Gaza-based welcoming committee said the Rachel Corrie had been intercepted and all communications with the ship cut.
"Several Israeli boats surrounded them between 30 and 35 miles off Gaza and prevented them from reaching Gaza," Amjad al-Shawa said after speaking by telephone with passengers on the boat.
In a last communique issued at around 5:38 am (0238 GMT), activist Jenny Graham, who is on board the Rachel Corrie, told organisers the vessel was being approached by two Israeli warships.
Graham said equipment on board had been "jammed by the Israeli navy, and that they expected their satellite phone to be jammed soon as well," the Ireland Palestine Solidarity Campaign said, adding that it was not able to determine the ship's location when it was intercepted.
Israeli public radio, which also reported that the ship had been intercepted, said it was being escorted by three navy vessels through a stretch of water some 35 miles from the Egyptian coast.
The incident comes at a very sensitive time for Israel, which is contending with the diplomatic fallout of an earlier raid on a flotilla of Gaza-bound aid boats, which left nine people dead, most of them Turks.
Despite an international outcry over the deadly commando operation, Israel has vowed to block all attempts to reach Gaza by sea in defiance of the tight blockade it has imposed on the impoverished territory since 2006.
"I have just told the Irish foreign ministry director general that the ship will not be able to travel to Gaza without first being inspected," Israeli Foreign Minister Avigdor Lieberman said in remarks broadcast late on Friday.
Irish Foreign Minister Micheal Martin urged Israel to show restraint, saying: "The Rachel Corrie should be allowed to proceed to Gaza and to unload its humanitarian cargo."
Activists on board the ship had said they would be prepared to let the cargo be inspected by "an independent international body" -- preferably the United Nations.
"We are not afraid," Irish Nobel Peace Prize winner Mairead Maguire told Ireland's RTE public radio by phone late on Friday.
"We started out to deliver this cargo to the people of Gaza and to break the siege of Gaza, that is what we want to do," the 66-year-old said as the vessel steamed towards the Hamas-controlled Palestinian territory.
Washington said on Friday it was trying to help avert another violent clash at sea involving Israel, with National Security Council spokesman Mike Hammer saying the ship should dock at Ashdod.
"In the interest of the safety of all involved, and the safe transmission of assistance to the people of Gaza, we strongly encourage those on board the Rachel Corrie and other vessels to sail to Ashdod to deliver their materials to Gaza."
Israel had warned it would stop the Rachel Corrie -- a 1,200-tonne cargo ship named after a US activist killed in 2003 as she tried to prevent an Israeli bulldozer from razing a Palestinian home.
The two sides involved in Monday's deadly operation have conflicting versions of what happened, with Israel saying its commandos only opened fire after they were attacked with clubs, knives, guns and other weapons.
Bulent Yildirim, head of the Turkish Islamic charity IHH said activists used iron bars in self-defence after commandos fired indiscriminately when they stormed the Turkish ferry Mavi Marmara.