"We concluded that we should remove listings in Israeli settlements in the occupied West Bank that are at the core of the dispute between Israelis and Palestinians", a statement on the Airbnb website said.
The decision, affecting some 200 listings, would take effect in the coming days, Airbnb said.
"Israelis and foreigners may rent properties in settlements, but Palestinian ID holders are effectively barred", HRW said in a statement announcing the report's release.
The decision comes as Airbnb had been widely criticized by rights groups and activists ever since reports first revealed in 2016, that the company was listing the rentals as being part of Israeli territories and not Palestine.
Around 400,000 Israelis live in West Bank settlements, which range in size from tiny hamlets to large towns.
Israeli Tourism Minister Yariv Levin called Airbnb's move "the most wretched of wretched capitulations to the boycott efforts". "We urge other companies to follow suit".
A general view shows a road leading to the Jewish West Bank settlement of Dolev where rental properties listed on Airbnb were offered, February 23, 2016. And Gilad Erdan, the minister of strategic affairs, is encouraging people affected by the new policy to file lawsuits against Airbnb.
Israeli politicians blasted the decision.
Erdan said Airbnb "will have to explain why it is taking this discriminatory and racist line here in particular and not in other conflict zones in the world". According to Airbnb's website, these restrictions were made "to comply with global regulations that restrict the use of our site by residents of certain countries" and are not related to the company's newly announced "disputed region" policy. Due to U.S. sanctions, the Airbnb platform is not available in Crimea, Iran, Sudan, Syria, or North Korea.
However, he said the company should have followed "the position of worldwide law that Israel is the occupying power and that Israeli settlements in the West Bank, including occupied East Jerusalem, are illegal and constitute war crimes".
Strategic Affairs Minister Gilad Erdan said that he would speak with USA officials and find out whether Airbnb has violated American laws against Israeli boycotts.
The Yesha Council, which represents Israeli settlers, accused the company of becoming "a political site".
Israel's official position is that the territory in the West Bank is disputed, not occupied.
Palestinian officials pledged to take action against the company for falsely identifying the location of the settlements, though users themselves were able to select the locations and fill in their own details.
That is "the only example in the world the organisations found in which Airbnb hosts have no choice but to discriminate against guests based on national or ethnic origin", it said.
The company acknowledged in their statement this week that the question of whether or not to facilitate the conduction of business in the illegal settlements which lie over the green line has been a concern in recent years.