Civilian casualties occur during military attacks. Such ‘collateral damage’ is prohibited by international laws but increases with substantial consequences when intergroup conflict escalates. Here, we investigate cognitive and neural bases of decision-making processes resulting in civilian harm, using a task that simulates punishment decision-making during intergroup conflict. We test two groups of Chinese participants in a laboratory setting, and members of two ethnic groups (Jewish and Palestinian) in Israel. The results dissociate two psychological constructs, harm preference and harm avoidance, which respectively characterize punishment decision-making related to outgroup combatants and outgroup noncombatants during intergroup conflict. In particular, individuals show decreased avoidance of harming outgroup noncombatants when conflict escalates. Brain imaging (functional magnetic resonance imaging) reveals that decreased harm avoidance is predicted by inhibition of the left middle frontal activity during selection of punishment decisions. Our findings provide insight into the cognitive and neural bases of decision-making involving civilian harm during intergroup conflict.