The Swedish government has refused to apologise for the article published in Sweden's Aftonbladet on Monday last week, saying the country's press freedom prevents it from intervening.
"If I devoted myself to correcting all the strange claims in the media, I would probably not have time to devote to very much else," said Carl Bildt, the Swedish foreign minister.
The controversy comes two weeks before Bildt is to visit Israel, with Stockholm currently holding the rotating EU presidency.
|The Aftonbladet report said Ghanaian's body had been returned with a long scar
In the article, Donald Bostrom, a Swedish freelance journalist, writes about the shortage of body parts in Israel and makes references to the so-called New Jersey scandal earlier this summer which involved rabbis, illegal organ trading and money laundering.
Bostrom then gives what he says is his own eyewitness account of an Israeli army raid on a Palestinian village in 1992.
He told Al Jazeera he was not anti-Semitic and insisted what he wrote was true.
"The body was taken away and the authorities made an autopsy with this young man against the will of the family," Bostrom said.
"All those things are actually true and happened. When the military returned the body the family said, 'We think they stole the organ of the body' because there was an empty belly.
"What I do is to refer to three things which have actually happened: the boy was shot dead, the autopsy, and the family claiming the body was emptied of organs."
The article has sparked outrage in Israel, with scores of ministers and commentators calling it anti-Semitic and reminiscent of mediaeval libels that Jews killed Christian children for their blood.
"If I devoted myself to correcting all the strange claims in the media, I would probably not have time to devote to very much else"
Carl Bildt, Swedish foreign minister
Yuval Steinitz, the Israeli finance minister, said: "In the Middle Ages, slander was spread accusing Jews of preparing Passover matza [unleavened bread] with the blood of Christian children.
"And today it is IDF [Israeli Defence Force] soldiers who are accused of killing Palestinians to take their organs."
Steinitz said on Sunday that the crisis would continue "as long as the Swedish government doesn't change its attitude towards this anti-Semitic article.
"Those who do not condemn it are not welcome in Israel."
Gideon Levy, a political analyst for Israel's Haaretz newspaper, described the dispute as "out of proportion" and an attempt by Israel to undermine Sweden's criticism of Israel's occupation of the Palestinian territories.
"I think this is a very good example of very bad journalism and very bad diplomacy," he told Al Jazeera on Monday.
"The story was published without any kind of factual grounds and it was very easy to deny it and very hard to prove it."
Daniel Seaman, the head of the Israeli government press office, said on Sunday he would not give accreditation to two of the newspaper's reporters planning to visit the Gaza Strip.
A spokesman for Israel's interior ministry said it was freezing the issue of entry visas to Swedish journalists, though those already working in the country would not be
affected for now.
The newspaper commented on its story on Sunday, acknowledging that it had no proof of any organ theft but argued that the story deserved publication because of the issues it raised.