The central bank issued a circular over the weekend, saying it "has been decided to terminate the activities of the Islamic finance services" offered by conventional banks.
The order is effective immediately but gave lenders a grace period until December 31 to shutter operations, sources said.
Shares in Qatar National Bank (QNB), the Gulf state's largest lender by market capitalisation, fell 4.8 per cent on the announcement. The bank offers Islamic services which comply with sharia laws.
"I don't think anyone was expecting it. It certainly came as a surprise and will affect us and others quite materially," said a Doha-based banking source who did not want to be identified.
"My understanding is that by the end of the year, all banks have to have the Islamic assets off their balance sheets. But we're still trying to figure out what it means."
Sources at two of the banks said they will seek clarification from the central bank on options available and whether they will be able to pursue a banking licence for their Islamic operations after the withdrawal.
Other banks affected by the directive include international lender HSBC, Doha Bank, Commercial Bank of Qatar, Al Ahli Commercial Bank and International Bank of Qatar. Calls and e-mails sent to the central bank were not answered.
For standalone Islamic banks, the central bank's verdict may prove to be a windfall. Shares of Islamic lenders soared on the news, with Masraf Al Rayan up 10 per cent and Qatar Islamic Bank rising 9.4 per cent.
"It's going to be very positive for us. We'll have a much bigger customer base. We see it as a very positive move," said Adel Mustafawi, chief executive of Masraf al Rayan.
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