Israel’s envoy to Germany has criticised a far-right Israeli cabinet member who made historically charged accusations against the German chancellor, Friedrich Merz, saying the attack “[eroded] the memory of the Holocaust”.

In a rare rebuke of a top Israeli official by an active ambassador, Ron Prosor said he wished to “unequivocally condemn” Bezalel Smotrich’s tirade against Merz, in which he made reference to the Nazi regime and said: “You will not force us into ghettos again.”

The row, which erupted after the chancellor raised objections to settlements in the occupied West Bank, marks the latest clash between Berlin, seen as Israel’s closest ally in Europe, and Benjamin Netanyahu’s government over its actions toward Palestinians.

Merz’s office released a statement late on Monday after telephone talks with Netanyahu, saying he had urged Israel to stop military attacks on southern Lebanon and expressed “deep concern about developments in the Palestinian territories”. A “de facto annexation” of the West Bank must not be allowed, he added.

In response, Smotrich, the Israeli finance minister, invoked the Nazis’ murder of 6 million Jews during the second world war.

“On the eve of Holocaust Remembrance Day [on Tuesday], the German Chancellor should bow his head and apologize a thousand times on behalf of Germany, rather than daring to preach morality to us on how to conduct ourselves against the Nazis of our generation,” he said on X, apparently equating the Hamas-led attackers of 7 October 2023 with all Palestinians.

Smotrich, a self-declared “fascist homophobe” who has called for government reprisal attacks on Palestinians, criticised “hypocritical leaders in Europe” and told Merz: “​Mr Chancellor, ​the days when Germans dictated to Jews where they were permitted or forbidden to live are over and shall not return. You will not force us into ghettos again, certainly not in our own land.”

On Tuesday, Prosor said Smotrich’s attack “erodes the memory of the Holocaust and presents it in a completely distorted way”.

“It is possible and completely legitimate to argue with the Germans, especially on this day, which is very emotional,” Prosor told Kan public radio.

“There is a political debate all the time, but Merz is a great friend of Israel,” he added. “Many things that Germany does are unacceptable to us, and things that we do are unacceptable to them. But Germany has proven, especially with all the criticism against Israel in Europe, that it is our number one friend.”

Germany views Israel’s security as integral to its own Staatsräson, or bedrock policy based on a solemn bond between the nations after the Holocaust.

However, Israeli officials in recent months have bridled at even cautious criticism from Berlin, while Germany has distanced itself from the US-Israeli military action against Iran.

Merz drew fire last August from Netanyahu’s government and members of his own conservative CDU party when he announced Germany would stop exporting military equipment that could be used in Gaza, due to the unfolding humanitarian disaster there.

Germany has long condemned Israel’s expanding settlement activity in the West Bank, and recently urged Israel to halt a sprawling construction project Smotrich has championed, which he said would help prevent the establishment of a Palestinian state.

Last month, the Israeli foreign minister, Gideon Saar, berated Germany’s ambassador to Israel, Steffen Seibert, over his opposition to deepening Israeli control in the West Bank, accusing the envoy of an “obsession” with Jewish settlers.

At the same time, he asserted, Seibert found it “very difficult to condemn attacks against Israelis without bringing up the Palestinians”.

Seibert had previously spoken of a “day of outrage and sadness” after the death of an Israeli by Hezbollah fire and hundreds injured by Iranian missiles. “And in a parallel reality: the violent settler rampage in Palestinian villages following the tragic and to be investigated death of one of their own,” he posted on X, referring to reprisal attacks.

Mairav Zonszein, a senior analyst on Israel at the International Crisis Group, said on Tuesday that the Israeli government had repeatedly targeted Germany “for invoking the basic human rights of Palestinians”. “They do so even at the expense of alienating their strongest European ally,” she wrote on social media.

Zonszein called on Berlin to recalibrate its approach to the Netanyahu administration in light of the open conflict. “It’s time for Germany to reassess its support for Israeli actions that not only contradict its policies but are now the basis for vitriol against state leaders,” she wrote.