The championships, a qualifier for the 2020 Tokyo Paralympics, had been scheduled for Kuching between July 29 and Aug 4.
The IPC said a new venue would be sought for the same dates, although there might have to be some flexibility in the light of circumstances.
"All World Championships must be open to all eligible athletes and nations to compete safely and free from discrimination," said IPC president Andrew Parsons in a statement after a meeting of the IPC governing board in London.
"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."
Malaysia, a majority-Muslim country that does not maintain diplomatic relations with Israel, announced this month that it would bar Israelis from any event held in the Southeast Asia nation.
Israel had condemned the ban as "shameful" and said the decision was inspired by Prime Minister Dr Mahathir Mohamad's "rabid anti-Semitism".
Mahathir, 93, has for decades been accused of anti-Semitism for his attacks against Jews. In a BBC interview last October, he described Jews as "hook-nosed" and blamed them for the troubles in the Middle East.
Some 600 swimmers from 60 countries had been expected to compete in the championships in the eastern state of Sarawak, with more than 160 titles to be won.
The IPC said all potential replacement hosts were asked to express an interest by Feb 11.
"The Paralympic Movement has, and always will be, motivated by a desire to drive inclusion, not exclusion," said Parsons in the statement.
"Regardless of the countries involved in this matter, the IPC would take the same decision again if it was to face a similar situation involving different countries."
He said that when Malaysia was awarded the championships in 2017, the IPC had been given assurances that all eligible athletes and countries would be allowed to participate with their safety assured.
"Since then, there has been a change of political leadership and the new Malaysian government has different ideas," said Parsons.
"Politics and sport are never a good mix and we are disappointed that Israeli athletes would not have been allowed to compete in Malaysia."
- Reuters
https://www.malaysiakini.com/news/461939