The sanctions were imposed jointly by France and Canada, which said in a joint statement with Britain that the actions “mark another turning point in our approach to defending the two-state solution.”
The settlements are illegal under international law, and recent months have seen an increase in violence against Palestinians in the West Bank by settlers.
In a statement to MPs, Miliband said: “The British Government accepts that Palestinian areas of the West Bank are being subjected to ethnic cleansing by terrorist settlers.
“And too often, the Israeli government has turned a blind eye, and, worse, its members have made statements and taken actions in support of the forced displacement of Palestinians.”
According to him, ethnic cleansing is defined by the UN as “a deliberate policy developed by one ethnic or religious group for the purpose of expelling another ethnic or religious group from certain territories by violent means.”
Miliband said the government’s official view was that Israel’s occupation of the West Bank was illegal due to “the consolidation of its control, its intention to extend permanent sovereignty and its expansionist program through illegal settlements.”
This position, Miliband said, should be reflected in the UK’s “economic relations” with the occupied West Bank.
As a result, he said the UK would introduce a “new comprehensive sanctions regime” over the next six to nine months.
The Foreign Secretary also announced a UK ban on advertising for illegal settlements in the West Bank.
“The sanctions regime will target illegal settlements and their expansion, not Israel,” Miliband added.
Later on Tuesday, Prime Minister Andy Burnham said the targeted measures were “not aimed at the Israeli people, but at supporting a two-state solution.”
Announcing the closure of the British consulate, which represents the British government in Jerusalem, the West Bank and Gaza, Saar told a press conference: “We know we have many friends in the UK.
“Unfortunately, we have a hostile Labor government that has consistently acted against the State of Israel, and it has left us no choice but to respond to its hostile actions.”
He added that 11 British MPs, including Jeremy Corbyn, Diane Abbott and all five sitting Green Party MPs, would be banned from entering Israel, accusing them of “anti-Semitic and anti-Israel activities”.
The UK also issued a joint statement with 11 other countries; France, Canada, Denmark, Spain, Finland, Ireland, Iceland, Norway, Poland, Portugal and Sweden.
The statement said the group was unequivocally committed to a two-state solution and would introduce national measures or support European restrictions on goods trade with settlements in the West Bank.