The Canadian vessel Tahrir and the Irish boat Saoirse set off from the Turkish port of Fethiye on Wednesday, carrying 27 pro-Palestinian activists from nine different countries.
The flotilla aimed to reach the port of Gaza City by late Friday, and by Thursday had progressed into international waters without any sign of Israeli intervention.
But the two ships were intercepted and boarded by the Israeli military on Friday afternoon, having got to within 40 and 60 miles from the Gaza coast.
The Israeli military said the vessels, carrying medical supplies intended for the Palestinian people, were boarded peacefully after numerous calls to the activists to turn around.
"Following their unwillingness to co-operate, and after ignoring calls to divert to the port of Ashdod, the decision was made to board the vessels and lead them there," the military said in a statement.
In a press release issued by organisers shortly after they said they had lost contact with the two boats, David Heap, a member of the steering committee on board the Tahrir, said the fact the boats had reached international waters was a "victory for the movement."
In an online press conference about the flotilla, the Institute for Middle East Understanding (IMEU) said that even though the ships had not been able to reach Gaza, the actions of those on board had helped draw international attention to the situation there.
The activists said their latest attempt to break the blockade was part of a campaign called "freedom waves." They also said they will keep trying until they eventually get through.
"We are closer to Gaza this time, and hope to get even closer the next time, until we reach our destination," said Heap.
Israel has maintained a four-year land an air blockade preventing the provision of any supplies to the 1.6 million Palestinian living in Gaza. There has been considerable controversy as to whether the blockade is illegal under international law. A UN investigative committee concluded in the Palmer Report, published Sept. 2011, that the blockade was not illegal, but critics say that the report failed to consider the "collective punishment" the siege has enforced on those living under it.