Row breaking out between Ken Loach and Edinburgh Film Festival organisers

The payment was intended to enable Tali Shalom Ezer, a graduate of Tel Aviv University, to travel to Scotland for a screening of her new film, Surrogate.

Mr Loach, whose acclaimed new film, Looking for Eric, has been one of the highlights of this year's Cannes Film Festival, on Monday urged filmgoers to boycott the festival in light of the cash award.

Mr Loach has been an outspoken critic of Israel's policies in Lebanon and Gaza and took the action after days of protest from pro-Palistinian organisations.

He said: "The massacres and state terrorism make this money unacceptable. With regret, I must urge all who might consider visiting the festival to show their support for the Palestinian nation and stay away."

The festival's organisers took the controversial decision to return the money to the Israeli embassy shortly after Mr Loach's comments.

In a statement organisers said they accepted Mr Loach spoke "on behalf of the film community, therefore we will be returning the funding issued by the Israeli Embassy".

Sir Jeremy Isaacs, the former chief executive of Channel Four, accused the festival's organisers of making an "appalling decision" and called on them to rescind it.

He said: "The idea that Ken Loach should lend himself to the denial of a film-maker's right to show her work is absolutely appalling. I would like to think this appalling decision will be rescinded. They must not allow someone who has no real position, no rock to stand on, to interfere with their programming."

Ms Ezer is seen as one of the brightest Israeli talents in film and recently one an award at an international women's film festival.

Ken Loach's new film has been lauded by critics at Cannes and features former Manchester United footballer Eric Cantona.

Lord Janner of Braunstone, former chairman of the Board of Deputies of British Jews, said: "The festival should reconsider this boycott and should pay Ms Ezer's travel costs out of its own budget."