The move has come amid rising tensions in Kashmir after an attack on an Indian military post. Pakistan's PM Khan separately authorized his military to "respond decisively" to any "aggression" by India.
India's infrastructure minister, Nitin Gadkari, announced on Twitter on Thursday that his country had "decided to stop our share of water which used to flow to Pakistan."
India blames Pakistan for the attack, which killed 40 paramilitary soldiers, whereas Pakistan denies any involvement.
Water usage rights in the region are covered by the 1960 Indus Waters Treaty, which gives India control over the eastern Sutlej, Beas and Ravi rivers; and Pakistan control of the western Indus, Jhelum and Chenab.
Gadkari, whose ministerial brief includes transport and water resources, also announced that India had begun construction of a dam on the Ravi river, a major tributary to the Indus.
Most of Kashmir, located in the Himalayas, is split between Pakistan and India, with both sides also claiming the right to the other's portion. The first full-blown insurrection in the region erupted in 1989, with insurgents demanding independence or unification with Pakistan.
Both issues, water and borders, have been the cause of war between the nuclear neighbors in the past. They have gone to war twice over Kashmir and have been engaged in talks over water rights for decades.
Khan warns against 'aggression'
Addressing India's threat of a "jaw-breaking response" to last week's attack, Pakistani Prime Minister Imran Khan on Thursday authorized his country's military to "respond decisively and comprehensively to any aggression or misadventure."
Khan also reiterated the contention that Pakistan was "not involved in any way, means or form" in the Kashmir attack, adding that it was "conceived, planned and executed indigenously."
Pakistan says unrest in Kashmir is a result of India's "military occupation" of the region. It has offered its assistance to India in the investigation to find and punish the perpetrators of the attack.
js/msh (AP, dpa)