The Irish Ship to Gaza (ISG) campaign said the propeller of the ship, the "Saoirse", had been "sabotaged in a dangerous manner" in the Turkish port of Gocek where it has been berthed for the past few weeks.
ISG said "Israel has questions to answer and must be viewed as the chief suspect in this professional and very calculating act of sabotage".
It said it would take too long to repair the damage and therefore the Saoirse "cannot participate in Freedom Flotilla 2".
The activists said the damage was similar to that reported on Monday by another ship that had been intending to join the flotilla, the Swedish-owned "Juliano", which is docked in the Greek port of Piraeus.
Fintan Lane, ISG national coordinator, claimed the "Saoirse" had been the target of a "reckless action" and an "act of international terrorism".
"It is an act of violence against Irish citizens and could have caused death and injury," he said.
"If we had not spotted the damage as a result of a short trip in the bay, we would have gone to sea with a dangerously damaged propeller shaft and the boat would have sunk if the hull had been breached. Imagine the scene if this had happened at nighttime."
The ISG claimed the vessel's propeller shaft had been damaged "by saboteurs who cut, gouged or filed a piece off the shaft".
"This had weakened the integrity of the shaft, causing it to bend badly when put in use," the group said.
It called on the Irish government and the Northern Ireland executive -- several of the 25 activists and crew on board hail from the north -- to "insist that those who ordered this act of international terrorism be brought to justice".
Israel has repeatedly said it is determined to stop the flotilla, which organisers said Wednesday would comprise at least 11 ships, including the Irish boat.
A similar attempt by an international flotilla to reach Gaza in May last year ended in the deaths of nine Turks when Israeli troops stormed the lead vessel.
Paul Murphy, an Irish Socialist Party member of the European Parliament, who had been due to sail on the "Saoirse", said there was "overwhelming evidence" of Israeli involvement in the damage.
Former Irish rugby international Trevor Hogan, who was also among the activists, said if the damaged propeller had not been spotted the consequences could have been disastrous.
"It would have resulted in undoubtedly the ship sinking and there would have more than likely been a loss of life," he told RTE radio.
Nearly 300 pro-Palestinian activists from 22 countries including Canada, France, Greece, Italy and Spain are set to join this year's flotilla, among them middle-aged and elderly Americans and Europeans.
They are to be joined by 35 journalists, according to organisers.
But the problems with the ships have pushed the flotilla's departure back to the coming weekend at the earliest.
The Irish group said concerns about the "Saoirse" first emerged on Monday following a short trip near the Gocek marina and an inspection was carried out by divers and the boat's skipper on Tuesday.
"Evidence was found that the shaft of the starboard propeller has been interfered with and it was decided to take the boat out of the water for a further visual inspection," it said.
"On Wednesday, the boat was put on land at a local shipyard and the extent of the sabotage was immediately visible."