In a speech broadcast live on state television on Wednesday, Ahmadinejad told a crowd in the southern city of Zahedan: "They have fabricated a legend under the name Massacre of the Jews, and they hold it higher than God himself, religion itself and the prophets themselves.
"If somebody in their country questions God, nobody says anything, but if somebody denies the myth of the massacre of Jews, the Zionist loudspeakers and the governments in the pay of Zionism will start to scream."
Responding to the comments, Israel urged the international community to "open its eyes" to the Iranian regime and its nuclear programme.
Mark Regev, spokesman for the Foreign Ministry, said: "We hope these extremist comments by the Iranian president will make the international community open its eyes and abandon any illusions about this regime."
The European Union also added its condemnation, with Douglas Alexander, Britain's minister for Europe, saying the comments had no place in international debate.
"The comments are wholly unacceptable and we condemn them unreservedly"
UK minister for Europe
"The comments are wholly unacceptable and we condemn them unreservedly. They have no place in civilised political debate," said Alexander, whose country currently holds the EU presidency.
Speaking in Strasbourg to the applause of European parliamentarians, he said that "the presidency has been unequivocal in its condemnation of the comments attributed to President Ahmadinejad of Iran".
'Off the map'
The Iranian leader's comments come days after his inflammatory statements that the state of Israel should be moved to Europe.
The president, who said in October that Israel must be "wiped off the map", said last week 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.
He was being interviewed on Al-Alam, an Iranian state satellite channel while in Makka, Saudi Arabia, where he was attending a summit of the Organisation of the Islamic Conference.
The remarks drew criticism from the UN, the UK and Germany, among others.
Ahmadinejad was elected as successor to Mohammed Khatami in June, and has caused concern for some in the West with his hardline rhetoric.