All "dealing, establishing ties or contacts and opening representative offices of any type at any level with the Zionist entity, directly or indirectly" would be banned.
The bill would also prohibit government and private agencies, individuals and companies from striking agreements and protocols with Israel and from meeting with Israelis.
It stipulates a prison term of between three and 10 years and a fine not exceeding $ 17,500 for violators.
Parliament will later set a date for debate the bill, which must be passed by parliament and signed by the emir to become law.
A similar one introduced two years ago never reached the floor for debate.
Like other Gulf Arab states, US-ally Kuwait has insisted on not establishing ties with Israel before a comprehensive Mideast peace deal, including the establishment of an independent Palestinian state.
The MPs cited Israel’s continuing refusal to implement international resolutions and its "barbaric" aggression against Palestinians in Gaza Strip.
Kuwaiti law already bans dealing with what it calls the "enemy" but does not make a specific reference to any state.