Among the 13 passengers on the Zaytouna-Oliva were several parliamentarians, an Olympic athlete and a Nobel Peace Prize laureate.
The boat's Australian skipper, Madeline Habib, recorded an SOS video message prior to the interception.
The Israeli military said the takeover was brief and there were no injuries.
"The Israeli navy advised the vessel numerous times to change course prior to the action. Following their refusal, the navy visited and searched the vessel in international waters in order to prevent their intended breach of the lawful maritime blockade of the Gaza Strip," a military statement said.
Earlier, Palestinians had gathered on Gaza City's Mediterranean shoreline hoping to welcome the vessel.
The boat was being escorted to the Israeli port of Ashdod, the military said, a process that was expected to take several hours. There was no word on what would happen to the people on board. In the past, activists have been arrested and quickly deported.
The Australian Department of Foreign Affairs and Trading says it is seeking to confirm reports that an Australian woman has been detained by Israeli authorities
The boat was sponsored by the Freedom Flotilla Coalition, a group of pro- Palestinian groups based mostly in Europe. It set off from Barcelona. A map tracking its journey showed it's last reported position about 42 nautical miles from Gaza.
Zaher Darwish, one of the coordinators of the flotilla, said the boat was intercepted about 60km from Gaza and was not carrying any aid. He said the goal was "symbolic" - to call attention to the Israeli naval blockade of Gaza,
which he called illegal.
"People have the right to move. We have the right to move," Darwish said. "We are aiming to the conscience of the people. And the conscience of governments. They have to act and express their non-acceptance of this situation.
Israel and Egypt imposed a blockade on Gaza after the Hamas militant group seized power in 2007. The blockade has stifled Gaza's already weak economy, where unemployment is over 40 per cent, and prevented tens of thousands of people from travelling abroad for jobs, studies and other visits overseas.
Israel says the restrictions are needed to prevent Hamas from importing weapons, and says it has eased the blockade to allow more goods into the territory. It considers Hamas, an armed group sworn to Israel's destruction, a terrorist group, and the sides have fought three wars since the Hamas takeover.