One of the exchange's traders, David Vardi, was implicated in an attempt to smuggle $140 000 worth of rough diamonds from Zimbabwe into Israel, said Israel Diamond Exchange president Avi Paz.
"After a meeting it was decided to expel him from our ranks," Paz, who is also president of the World Federation of Diamond Bourses, told AFP.
Last week Israeli customs detained an Israeli coming through the Ben Gurion International airport from Zimbabwe and discovered he was carrying the rough stones, said Paz.
The man implicated Vardi and said he was supposed to hand the diamonds to Vardi's son-in-law, who was waiting outside the airport.
Paz said both Vardi and the smuggler had been arrested and later released on bail.
"We are committed to the Kimberley Process," said Paz.
Israel currently heads the Kimberley Process, an organisation meant to ensure diamonds are "conflict free."
Last year it suspended its certification of Zimbabwe's Marange fields, over claims of forced labour and torture at the diamond mines.
So-called conflict diamonds have been used by rebel movements to finance wars against legitimate governments and have fuelled decades of conflict in Angola, Ivory Coast, the Democratic Republic of Congo and Sierra Leone.
The Kimberley Process joins government, industry and civil officials from numerous countries to stem the flow of such diamonds from Africa, imposing strict standards on its members to enable them to certify shipments of rough diamonds as being "conflict free."