The dispute centres on six teams from lower divisions of the Israeli league which are based in settlements on the occupied West Bank and play their matches there.
The Palestinian Football Association (PFA) says this is contrary to FIFA statutes which state that a member country’s teams cannot play matches on the territory of another association without permission.
The PFA has also complained that Israel hampers its activities, including limiting the movement of players between the West Bank and Gaza, and that it has barred some international travel.
Israel has cited security concerns for its actions and the Israeli FA says it is not responsible for the actions of its government.
In 2015, the PFA proposed during a FIFA Congress that Israel be suspended from international soccer but backed down after FIFA set up a task force led by South African politician Tokyo Sexwale.
"FIFA has decided to refrain from imposing any sanctions or other measures on either the Israel FA or the Palestinian FA," Infantino told a news conference after a FIFA Council meeting.
"These territories are a concern for the international public law authorities and FIFA has to remain neutral."
A FIFA statement added: "The matter is declared closed and will not be the subject of any further discussion until the legal and/or de facto framework has changed."
The statement acknowledged that the situation was exceptionally complex and said that any interference by FIFA could aggravate the footballing situation in the region.
It made no specific mention of the six clubs.
Israeli settlements on the occupied territories are considered illegal under international law, although Israel disputes this.
FIFA said it would "continue to facilitate the movement of players, officials and football equipment in, out of, and within Palestine."
(Writing by Brian Homewood in Bern, editing by Pritha Sarkar)