Saudi Arabia has said it is freezing all new trade with Canada and expelling its ambassador over its "interference" in the kingdom's domestic affairs.
A Saudi foreign ministry statement said it considered Canada's call last week for the release of detained civil society and women's rights activists a violation of Saudi sovereignty.
Those held include the Saudi-American human rights campaigner Samar Badawi, sister of jailed blogger Raif Badawi.
Canada said it was seeking "clarity".
However, foreign ministry spokeswoman Marie-Pier Baril stressed that Canada would "always stand up for the protection of human rights... including women's rights, and freedom of expression around the world".
"Our government will never hesitate to promote these values and believes that this dialogue is critical to international diplomacy," she added.
The leading Saudi women's rights campaigner Manal al-Sharif thanked Canada for "speaking up" and asked when other Western powers would do the same.
But Saudi Arabian Foreign Minister Adel al-Jubeir tweeted that Canada's position was based on "misleading information", adding that anyone arrested was "subject to Saudi laws that guarantee their rights".
Who is being held?
Last Tuesday, the Office of the UN High Commissioner for Human Rights said at least 15 human rights defenders and women's rights activists critical of the Saudi government had been arrested or detained arbitrarily since 15 May.
Eight of them are believed to have been released pending "procedural reviews", but the whereabouts of several others are unknown.
Among those reportedly still being held are Hatoon al-Fassi, a leading voice for women's participation in civil life; human rights defender Khaled al-Omair; women's rights activists Loujain al-Hathloul, Eman al-Nafjan, Aziza al-Yousef, Nouf Abdulaziz and Mayaa al-Zahrani; Ms Hathloul's 80-year-old lawyer, Ibrahim al-Modaimeegh; and the activist Abdulaziz Meshaal.
Several of those detained have been accused of serious crimes, including "suspicious contact with foreign parties", and could face up to 20 years in prison.
Human rights groups reported that Ms Badawi was also detained last week, along with fellow women's rights campaigner Nassima al-Sadah.
Ms Badawi was given the US International Women of Courage Award in 2012 and is known for challenging Saudi Arabia's male guardianship system. Her brother's wife, Ensaf Haidar, lives in Canada and recently became a Canadian citizen.
Raif Badawi was sentenced to 10 years in prison and 1,000 lashes for "insulting Islam" online back in 2014.
What did Canada say?
Foreign Minister Chrystia Freeland wrote on Twitter on Thursday that she was "very alarmed" to learn that Ms Badawi had been detained.
"Canada stands together with the Badawi family in this difficult time, and we continue to strongly call for the release of both Raif and Samar Badawi."
The next day, the Canadian foreign ministry called for their "immediate release".
How did Saudi Arabia react?
The Saudi foreign ministry statement expressed "disbelief [at] this negative unfounded comment, which was not based [on] any accurate or true information".
It insisted the activists were being detained lawfully and that the Canadian statements represented "blatant interference in the kingdom's domestic affairs" and "a major, unacceptable affront to the kingdom's laws and judicial process".
The ministry recalled its ambassador to Canada for consultations and declared the Canadian ambassador persona non grata, giving him 24 hours to leave.
Saudi Arabia would also "put on hold all new business and investment transactions with Canada while retaining its right to take further action", it said. Trade between the two countries was worth $3bn (£2.3bn) in 2016.
It also announced it was suspending all scholarships enabling Saudi students to study in Canada. Students already in the country would be relocated. It is unclear how many people this will affect, however, the Vancouver Sun said in 2015 about 5,000 news students arrive from Saudi Arabia each year.
The BBC's Martin Patience in Beirut says the surprise expulsion of the Canadian ambassador highlights the increasingly aggressive - and at times erratic - foreign policy being pursued by Saudi Crown Prince Mohammed Bin Salman.
He has introduced a raft of headline-grabbing reforms, such as lifting the ban on women being allowed to drive. But, our correspondent adds, during the recent crackdown on activists he has also shown that he will not tolerate dissent.
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