Swedish radio reported that Ambassador Zvi Mazel vandalised the Stockholm museum piece, called "Snow White and the Madness of Truth", on Friday.
The art installation consisted of a rectangular basin filled with red water on which floated a boat carrying a portrait of bomber Hanadi Jaradat.
The Palestinian woman killed herself and 19 others in an attack in the Israeli port city of Haifa in October.
Ambassador Mazel was among the guests at the opening of the Historical Museum's exhibition linked to an international anti-genocide conference to be held in Stockholm in January.
Public service SR radio news said Mazel furiously ripped out electrical wires attached to the art work and threw a spotlight in the basin.
"This was not a piece of art," Mazel told SR. "It was a monstrosity. An obscene distortion of reality."
After the bombing the Israelis
destroyed Jaradat's family home
Kristian Berg, the museum's director, said he realised the installation may have been emotional for Mazel, but that destroying art was unacceptable.
"If you don't like what you see, you can leave the premises," he said.
Human bombings by Palestinians on Israeli targets have killed scores of soldiers and civilians in recent years.
Israelis often cite the bombings as examples of "Palestinian terrorism", and use them as a juustification to crack down on Palestinian resistance groups.
However, many Palestinians believe the bombings are the only effective weapon a brutalised and defenceless people has against a heavily armed enemy.