Obama's aides accused the Clinton camp of "shameful, offensive fear-mongering", saying the photo is a smear attempt as it plays on some US voters' belief that he is a Muslim, when in fact he is a practicing Christian.
'Desperate' move
Professor Abdallah Schleifer, a foreign policy specialist at the American University in Cairo, told Al Jazeera the photograph seemed to be a "desperate" attempt to tarnish Obama's image in the US.
"It's not simply a matter that it's a picture of Obama, dressed as - quote - a 'Somali elder' ... it includes a turban - he's wearing a turban," said Schleifer.
"A turban is associated, number one, with Islam and most unfortunately - because of the propensity of Bin Laden [the al-Qaeda leader] and Ayman al-Zawahiri [his deputy], to wear turbans ever since the took refuge in Afghanistan and Pakistan, its a direct implication of early attempts to smear Obama that he's a Muslim."
He went on to say: "Why is that a smear? Well ... You have to understand that in America there is a section of society for which terrorism and Muslims are associated together."
A Clinton campaign volunteer was sacked last year after circulating an email that falsely suggested Obama was a Muslim.
Photo 'divisive'
Obama's foreign policy adviser, Susan Rice, said the circulation of the photograph was divisive and suggests "that the customs and cultures of other parts of the world are worthy of ridicule or condemnation".
Howard Wolfson, a Clinton spokesman, said: "I just want to make it very clear that we were not aware of it, the campaign didn't sanction it and don't know anything about it."
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Clinton aides have claimed the row is an attempt to distract voters ahead of the Texas and Ohio primaries on 4 March.
Rivalry between Obama and Clinton in the race for the Democratic presidential nomination has become increasingly bitter in recent days, and foreign policy has become a focal point.
In a speech in Washington on Monday, the former first lady criticised the Illinois senator's foreign policy experience, saying he had veered between pledging to meet leaders of nations such as Iran and Cuba as president to warning of US strikes on al-Qaeda targets in Pakistan.
"He wavers from seeming to believe that mediation and meetings without preconditions can solve the world's intractable problems, to advocating rash, unilateral military action without co-operation from our allies in the most sensitive region of the world," Clinton said.
Tougher message
Clinton has lost the last 11 Democratic presidential nominating contests to Obama and many analysts have said that she needs to win the forthcoming Ohio and Texas polls on March 4 to retain a chance of winning the nomination.
After a debate with Obama last Thursday in Texas in which she said she was honoured to share the stage with him, Clinton has toughened her message in the past few days.
She criticised Obama on Monday, saying that the US needed a leader with more foreign policy experience.
Americans took a chance on George Bush, the current president, and have been disappointed and should not take a chance again, she said.
"We've seen the tragic result of having a president who had neither the experience nor the wisdom to manage our foreign policy and safeguard our national security. We can't let that happen again," she said.
A Quinnipiac University poll published on Monday showed Clinton leading Obama in Ohio by 51 per cent to 40 per cent among probable Democratic voters.
Two weeks ago, Clinton led by 55 per cent to 34 per cent, a sign that the momentum Obama has gained from 11 straight victories was paying dividends in the state.