"Trade ties, military ties, regarding defense industry ties, we are completely suspending them," Recep Tayyip Erdogan, said in Ankara on Tuesday.
"This process will be followed by different measures," said Erdgoan, who referred to Israel as "a spoiled child", Al Jazeera reports.
Erdogan said Israeli diplomats ordered out of Turkey must leave by Wednesday.
He was referring specifically to defense trade, a spokesman later said, and not to general trade, the Wall Street Journal reports.
The WSJ reports:
Speaking to reporters in Ankara after giving a speech at the Ankara Chamber of Commerce, Mr. Erdogan repeated plans announced Friday to downgrade diplomatic relations with the Jewish state and suspend military agreements, specifying that the suspension of would include trade in defense goods.
"Trade relations, military relations, defense industry—these we will suspend. These will be completely frozen and that process will be followed also by very different sanctions," Mr. Erdogan said. Those measures still to come would be a "Plan C" to the "Plan B" already announced, he said.
So far, Turkey has announced no general trade sanctions against Israel. A spokesman for Mr. Erdogan said the prime minister had been referring in his remarks only to trade in defense goods, and not to trade in general. On Monday, Turkey's economy minister had said there would be no broader trade sanctions "for now."
Turkey and Israel did just under $3.5 billion worth of trade in 2010, according to official Turkish figures, and trade was up by a quarter in the first six months of this year.
Erdogan hinted on Tuesday that he might make a visit to Gaza, though adding that no final decision had been made yet, Al Jazeera reports.
"We are talking with the Egyptians on this matter ... A trip to Gaza is not finalized yet," Erdogan, who is due to visit Egypt next week.
Relations between the two deteriorated after Israel refused to apologize for its deadly raid on a Gaza-bound Turkish-flagged protest flotilla last year that left nine activists dead. A U.N. report last week found that Israel used "excessive" force but that it was entitled to its blockade of Gaza.
It also said that the pro-Palestinian activists had acted recklessly.
On Friday, Turkey expelled the Israeli ambassador in Ankara, suspended military deals and said it would have a greater naval presence in the eastern Mediterranean Sea.
"Israel's decision to board the vessels with such substantial force at a great distance from the blockade zone and with no final warning immediately prior to the boarding was excessive and unreasonable," the report said.
The inquiry called for Israel to make "an appropriate statement of regret" for the raid and pay compensation to the families of the dead as well as to injured victims.
Turkey and Israel should resume full diplomatic relations "repairing their relationship in the interests of stability in the Middle East," the report said.
Israel has expressed regret for the loss of lives in the 2010 flotilla raid but refused to issue an apology, saying it had acted in self defense.