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Students for Justice in Palestine has launched a campaign against the campus outlet, expected to open in June, calling on the university to cancel the contract.
Spokesman Damian Ridgewell warned of protests.
"There will be an active campaign on campus to encourage students and staff to boycott the shop," he told The Australian.
BDS activists claim the Max Brenner chain is owned by the Israeli-owned Strauss Group of food and confectionary manufacturers, which produces some rations for the Israeli Defence Forces, and accuse it of complicity in "Israeli war crimes".
The company insists that it is wholly Australian owned and operated.
A UNSW spokeswoman said the university "deplores any form of racism and discrimination" but added: "Free expression of views and open debate are central to the life of a university."
The spokeswoman said staff and students had been surveyed over new stores on campus.
"Max Brenner was the equal second most popular choice."
Tertiary Education Minister Craig Emerson slammed the boycott.
"The Australian government has always been firm and clear in its opposition to the Boycott, Divestment and Sanctions campaign," he said.
"Such boycotts against Israel, in addition to harming Palestinian people economically, are unhelpful to the Middle East peace process."
Executive Council of Australian Jewry head Peter Wertheim said action against Max Brenner had failed.
"Since the boycott campaign against Max Brenner Australia began in 2011, their business has really boomed," he said.
"Their shops are crowded with Australians of all backgrounds, including families with women wearing hijabs.
"Fair-minded people simply scoff at the boycotters' rhetoric characterising chocolate shop owners as 'war criminals'."
NSW opposition frontbencher Walt Secord urged "a reverse boycott" of the shop.
Australian Union of Jewish Students political affairs director Dean Sherr said he trusted the university would not back down.
He hoped "students are not harassed or physically prevented from entering".
Mr Sherr called BDS "an ugly attempt to delegitimise an entire nation".
"The problem with BDS is that it does nothing to offer solutions or initiatives for peace," he said.
"It's about attributing all the blame to Israel and punishing it, and calling into question the Jewish state's very right to exist."
He spoke of an recent incident at Melbourne's Monash University where a Jewish student was allegedly assaulted for attempting to put up a pro-Israeli poster.
Last week the University of Sydney Students Representative Council called for an academic boycott of Israel.
Original piece is http://www.theaustralian.com.au/higher-education/bds-targets-uni-over-campus-shop/story-e6frgcjx-1226622988371