The decision was taken "after the Home Ministry of Malaysia failed to provide the necessary guarantees that Israeli Para swimmers could participate, free from discrimination, and safely in the Championships," the IPC said.
IPC President Andrew Parsons said: "When a host country excludes athletes from a particular nation, for political reasons, then we have absolutely no alternative but to look for a new Championships host.
"All World Championships must be open to all eligible athletes and nations to compete safely and free from discrimination."
Malaysia PM cites Trump to defend Israeli athlete ban
The championships were due to take place in Kuching on July 29-August 4.
Israeli foreign ministry spokesman Emmanuel Nahshon tweeted: "This is a victory of values over hatred and bigotry, a strong statement in favour of freedom and equality. Thank you @Paralympics for your brave decision."
Earlier this month, Malaysia — a Muslim majority country —said it would "not host events" that have Israeli participation, with Foreign Minister Saifuddin Abdullah saying: "It is about fighting on behalf of the oppressed."
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