Speaking in Athens, Moshe Yaalon said IS had “enjoyed Turkish money for oil for a very, very long period of time”.
Turkey denies permitting IS smuggling, and the US recently rejected Russian allegations that Turkish government officials were in league the militants. IS has captured swathes of Syria and Iraq, including operational oil fields.
“It’s up to Turkey, the Turkish government, the Turkish leadership, to decide whether they want to be part of any kind of cooperation to fight terrorism,” Mr Yaalon told reporters after a meeting with his Greek counterpart.
“This is not the case so far. As you know, Daesh [Islamic State] enjoyed Turkish money for oil for a very, very long period of time. I hope that it will be ended.”
Mr Yaalon also alleged that Turkey had “permitted jihadists to move from Europe to Syria and Iraq and back”.
US state department officials last month rejected Russian allegations of Turkish government involvement but a state department spokesman said IS oil was being smuggled into Turkey via middlemen.
Efforts by Israel and Turkey to repair damaged ties already hit a setback this month over demands for compensation for the deaths of 10 Turkish activists on a ship carrying pro-Palestinian activists in 2010.
They were killed in clashes with Israeli commandos who intercepted a flotilla trying to break Israel’s blockade of Gaza.
Senior Israeli and Turkish officials met in December to try to repair relations, raising hopes of progress in negotiations to import Israeli natural gas.