The Israeli government is to reassign former West Bank settler leader Dani Dayan who had been its pick for ambassador to Brazil. The selection faced opposition from Brazilian leaders and other politicians.
Israeli Prime Minister Benjamin Netanyahu had initially vowed to stand firm on Argentine-born Dayan's nomination - even if the decision weakened relations with Brazil, one of the world's top ten economies.
But in a brief statement released on Monday, Netanyahu said that Dayan would instead serve as consul-general in New York.
The decision follows a nearly eight-month spat with the Brazilian government over Dayan's links to Jewish settlements in the occupied West Bank.
Brazil's left-leaning government recognized Palestinian statehood in 2010 and had maintained a frosty silence over Dayan's nomination last August, which is diplomatic protocol for objecting to a plan.
Approval for a new ambassador is normally given within two to three weeks, and any further delay usually implies that the nominee is not approved.
Reports later suggested that Brazilian President Dilma Rousseff had informed Jerusalem that she disapproved of the appointment.
Dayan served as chairman of the Yesha Council between 2007 and 2013, an organization set up to promote Jewish settlements in the West Bank and Gaza Strip. It led opposition to the disengagement plan, which saw Israeli settlements in the Gaza Strip dismantled.
Jewish settlements in the occupied territories are considered illegal under international law.
When asked about the decision by Israel's Army Radio, Dayan, who moved to Israel aged 15, said: "I don't think that we folded. There was no choice."
"Those that did not want us in Brasilia, ended up getting us in New York, the capital of the world," he added.
Israel's previous ambassador to Brazil stepped down in December.