A row threatened to engulf the Edinburgh International Film Festival yesterday after it bowed to pressure from the director Ken Loach and returned a £300 grant it had received from the Israeli Embassy.

Sir Jeremy Isaacs, the former chief executive of Channel Four, accused the festival’s organisers of making “an appalling decision” and called on them to rescind it. Describing Loach’s intervention as an act of censorship, he said: “They must not allow someone who has no real position, no rock to stand on, to interfere with their programming.”

The grant was intended to enable Tali Shalom Ezer, a graduate of Tel Aviv University, to travel to Scotland for a screening of her film, Surrogate.

After days of protest against the award from pro-Palestinian organisations, Loach, an outspoken opponent of Israel’s policies in Lebanon and Gaza, urged filmgoers on Monday to boycott Edinburgh.

“The massacres and state terrorism in Gaza make this money unacceptable,” he said. “With regret, I must urge all who might consider visiting the festival to show their support for the Palestinian nation and stay away.”

The intervention brought an immediate capitulation from the organisers. In a statement the festival said it accepted that Loach spoke “on behalf of the film community, therefore we will be returning the funding issued by the Israeli Embassy”.

Sir Jeremy said that he was disgusted both by Loach’s actions and by the capitulation of the festival organisers. “Ken Loach has always been critical of censorship of his own work, albeit it was many years in the past. The idea that he should lend himself to the denial of a film-maker’s right to show her work is absolutely appalling,” he said. He was “equally horrified” that festival organisers should accept that Loach was speaking on behalf of all British film-makers.

Sir Jeremy worked closely with Loach in the 1980s when, as chief executive of Channel Four, he commissioned a number of controversial documentaries from him. One, A Question of Leadership, was made in 1981 but never broadcast, leading to accusations of political censorship from Loach. The irony of the director’s present position was all the more obvious, given the spirit of the Edinburgh festival, Sir Jeremy said.

“It must be good for cinemagoers at an international film festival to see films by Jews, Arabs, Israelis and Palestinians, to the benefit of all,” he said.

“I have admired the Edinburgh International Film Festival for many years and would like to think that this appalling decision will be rescinded.”

Loach’s acclaimed new film Looking for Eric has made him the toast of the Cannes Film Festival. It is, uncharacteristically, a comedy, although its lead character is an authentic Loach creation — a Mancunian postman who goes off in search of his idol, the footballer Eric Cantona.

Ezer’s film makes no reference to war or politics. It is a romance set in a sex-therapy clinic. It won the audience award at an international women’s film festival in Israel recently.

Lord Janner of Braunstone, a Labour peer and former chairman of the Board of Deputies of British Jews, said that he was disappointed by the festival’s decision. “By banning the Israeli Embassy from supporting a film-maker the festival is helping to exclude Israelis from British cultural life, something that is clearly unfair.”

Last night a spokesman for the EIFF said that although it had returned £300 to the Israeli Embassy, the festival itself would fund Ms Shalom-Ezer’s travel to Edinburgh out of its own budget.

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