"The MV Finch, carrying sewage pipes to Gaza, had warning shots fired at it by Israeli forces in the Palestinian security zone this morning at 06:54," said Shamsul Azhar from the Perdana Global Peace Foundation.
"The vessel was in the Palestinian security zone, about 400m from the Gaza shoreline, when they were intercepted by Israeli naval forces," he said, adding it was now anchored 30 nautical miles away in Egyptian territory.
An Israeli army spokesperson confirmed that the vessel, flying a Moldovan flag, had been intercepted as it sailed from Egypt's El-Arish port, where it had been docked for several days.
"A navy patrol boat contacted the vessel, which claimed to be heading for the Gaza shores. Once it crossed into Israeli naval territory and didn't answer calls to turn back, warning shots were fired in the air and it returned to El-Arish," she said.
The Perdana Foundation is helmed by former Malaysian premier Mahathir Mohamad, an 85-year-old firebrand who was a strident critic of the West and Israel over the treatment of Palestinians during his two decades in power.
Volley of gunfire
The organisation was also involved in the first "Freedom Flotilla", a 2010 attempt to break the Israeli blockade on Gaza, which ended in disaster when naval commandos raided the aid ships, killing nine Turks on board one of the vessels.
Perdana Foundation officials said the MV Finch left the Port of Piraeus in Greece on May 11 for Gaza, carrying plastic pipes to help restore the "devastated" sewage system in Gaza.
Alang Bendahara, a Malaysian journalist on board, said Israeli naval ships stopped the vessel with a volley of gunfire as it approached the shore.
"The Israeli naval vessel fired a warning shot at us upon approaching and asked us to leave the waters but the ship's captain refused and the Israelis fired again, circling the MV Finch before firing twice more," he said.
"At that point they threatened the ship's captain that they would board the vessel and we were forced to turn back, it was lucky that no one was injured.
"Two Egyptian naval vessels were monitoring us and they escorted us once we were in Egyptian waters," said Bendahara.
"They have now boarded our vessel and are inspecting our cargo to make sure there is nothing illegal on board. They will be escorting us to the port of El-Arish because they say they will detain the ship."
The journalist said there were 12 people on board the vessel - seven Malaysians, two Irish nationals, two Indians and a Canadian - including anti-war activists and journalists.
Israel has maintained a blockade on the Gaza Strip since 2006, after militants there snatched Israeli soldier Gilad Shalit, who is still being held.
It was tightened a year later when the Islamist Hamas movement seized control of the territory, ousting forces loyal to the Western-backed Palestinian Authority.
Israel says the blockade is meant to stop the ruling Hamas movement from gaining access to weapons, money or material that could be used to attack the Jewish state.
But Palestinians say it prevents them from accessing material and goods that are desperately needed to rebuild infrastructure in the impoverished territory.
Israel agreed to relax some of the embargo's restrictions in July 2010, following a wave of international pressure after the botched raid on the Freedom Flotilla.
The incident sparked heavy criticism of Israel and led to a sharp deterioration in ties between Turkey and the Jewish state.