Speaking on Thursday in Makka, Saudi Arabia, where he was attending a summit of the Organisation of the Islamic Conference, he said that if Germany and Austria believed that Jews were massacred during the second world war, a state of Israel should be established on their soil.
Ahmadinejad, who said in October that Israel must be "wiped off the map", was being interviewed on Al-Alam, an Iranian state satellite channel. According to a translation of his comments given to AFP, he said: "You believe the Jews were oppressed, why should the Palestinian Muslims have to pay the price?
"You oppressed them, so give a part of Europe to the Zionist regime so they can establish any government they want. We would support it.
"So, Germany and Austria, come and give one, two or any number of your provinces to the Zionist regime so they can create a country there ... and the problem will be solved at its root.
"Why do they insist on imposing themselves on other powers and creating a tumour so there is always tension and conflict?"
Aljazeera said Israel has criticised the statements, and quoted Ranaan Gissin, adviser to the prime minister, as saying that Israel was established where the Jewish people's forefathers lived.
Mark Regev, the Israeli Foreign Ministry spokesman, said: "Unfortunately this is not the first time that the Iranian leader has expressed outrageous and racist views towards Jews and Israel.
"I hope that these outrageous remarks will be a wake-up call to people who have any illusions about the nature of the regime in Iran."
Ahmadinejad's remarks were condemned by Germany, Austria and the US, at the forefront of an international campaign to prevent Tehran from acquiring nuclear weapons.
Price of oppression
The comments were made on the
sidelines of a summit in Makka
In Ahmadinejad's interview, he referred to the Holocaust as a matter of belief, and raised the issue of revisionist historians - who attempt to establish that figures on the number of Jews killed by the Nazis are wildly exaggerated - being prosecuted in Europe.
The Holocaust was Nazi Germany's systematic slaughter of an estimated six million Jews between 1933 and 1945.
"Is it not true that European countries insist that they committed a Jewish genocide? They say that Hitler burned millions of Jews in furnaces ... and exiled them," he said.
"Then because the Jews have been oppressed during the second world war, therefore they [the Europeans] have to support the occupying regime of Quds [Jerusalem]. We do not accept this."
Scott McClellan, the White House spokesman, condemned the remarks. "It just further underscores our concerns about the regime in Iran," he said. "And it's all the more reason why it's so important that the regime not have the ability to develop nuclear weapons."
Angela Merkel, the German chancellor, said Ahmadinejad's suggestion that Israel was "totally unacceptable".
Wolfgang Schuessel, the Austrian chancellor, said after a meeting with President Bush, that the remarks were "an outrageous gaffe, which I want to repudiate in the sharpest manner".
Frank-Walter Steinmeier, Germany's foreign minister, said the EU's nuclear diplomacy is "not made easier by the fact that Mr Ahmadinejad comes up with new ideas, that the people of Israel could move to Germany and Austria, to resolve the Middle East problem".
A previous call to wipe out Israel
drew widespread condemnation
Ahmadinejad also proposed "a referendum in Palestine for all the original Palestinians" to decide on the future of what is now Israel, the Gaza Strip and West Bank.
But he said "the best solution is resistance so that the enemies of the Palestinians accept the reality and the right of the Palestinian people to have land".