British director Ken Loach has withdrawn his film Looking for Eric from the Melbourne International Film Festival to protest Israeli funding of another film participating in the festival.

Loach demanded that the festival reject the Israeli Embassy's sponsorship of Tatia Rosenthal to visit the festival to answer questions about her animation feature $9.99, but the festival organizers refused, saying that they would not bow to "blackmail," the Australian Broadcasting Corporation reported.

Earlier this year, the Edinburgh Film Festival returned a 300 pound grant from the Israeli embassy due to pressure from the renowned director.

ABC quoted Australian federal Labor MP Michael Danby as having applauded festival organizers for standing up to Loach, and saying that "Israelis and Australians have always had a lot in common, including contempt for the irritating British penchant for claiming cultural superiority."

He also said that it does not make sense to boycott Israeli films in order to make a political point against their country's government.

"Some people in Israel have been very critical of the Israeli film industry because of the way many films have been critical of the Government's actions in the Occupied Territories," he said.

"Why would you stop showing films that ask serious questions of the Israeli government in order to spite that very government?"

Melbourne International Film Festival chief executive Richard Moore insisted that as an independent arts event, the festival would not capitulate to political pressure.

"MIFF understands that that this issue is a particularly emotional one for people, but we will not participate in a boycott against the state of Israel, just as we would not contemplate boycotting films from China or other nations involved in difficult long-standing historical disputes," ABC quoted him as saying.

"Mr Loach's decision is part of an orchestrated campaign to target events that are in receipt of financial support from the state of Israel. Loach requested that we join the boycott and as an independent arts organization. MIFF has refused," he said.

Loach has long been an outspoken critic of Israel and its actions in Gaza and Lebanon.