The Indonesian warship named after the two MacDonald House bombers will not be allowed to call at Singapore's ports or naval bases.
The Singapore Armed Forces (SAF) will also not sail alongside or undergo training exercises with the frigate KRI Usman Harun, Defence Minister Ng Eng Hen said in Parliament on Tuesday.
Mr Zaqy Mohamad, MP for Chua Chu Kang GRC, had asked how the Defence Ministry (Mindef) and the SAF would respond to the Indonesian Navy's decision to name the new ship after the two marines who bombed the Orchard Road building in 1965, killing three people and injuring 33 others.
Dr Ng said of Indonesia's decision that Mindef "knew the harm it would cause to bilateral relations".
While Singapore wants good bilateral ties with Indonesia and has worked hard to develop friendship and military cooperation with it, he said the naming of the ship had heightened suspicions and resentments on both sides, "setting back many decades of relationship building in defence ties".
He added that the naming of the ship came as "an utter surprise".
"Mindef and the SAF were disappointed and dismayed over this inexplicable move," he said.
"Even without ill intent, how can the naming of the ship after the two bombers build good ties, or enhance mutual respect and regard with both our countries?"
When Singapore received news about the naming of the ship, Dr Ng called his Indonesian counterpart, who was in Europe.
Dr Ng said: "I would not have disturbed his trip unless it was an important matter and the Indonesian defence minister knew it."
He added that he stated the Government's position and followed up with a written note, so that there would be "no misunderstanding about our deep concern".
Indonesia Foreign Minister Marty Natalegawa had said last week that there was no ill will, malice or unfriendly outlook behind the decision and that Indonesia values its relationship with Singapore.
Foreign Minister K. Shanmugam had welcomed this as constructive.
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