Germany's foreign minister blasted the comments as "shocking and unacceptable" and warned that they will influence crucial between Europe and Iran.
Speaking to thousands of people in the southeastern city of Zahedan, Ahmadinejad said: "Today, they have created a myth in the name of Holocaust and consider it to be above God, religion and the prophets."
Ahmadinejad first provoked an international outcry in October when he called for Israel to be Previously he expressed doubt about the Nazi destruction of European Jewry during the World War II. But Wednesday was the first time when he said in public that it was a myth.
Touring southeast Iran, Ahmadinejad said that if Europeans insist the Holocaust did happen, then it was they who were responsible and they should pay the price.
"If you committed this big crime, then why should the oppressed Palestinian nation pay the price?" Ahmadinejad asked.
"This is our proposal: if you committed the crime, then give a part of your own land in Europe, the United States, Canada or Alaska to them (Jews), so that the Jews can establish their country," he said. That comment developed further .
In Israel, Foreign Ministry spokesman Mark Regev said: "The repeated outrageous remarks of the Iranian president show clearly the mind-set of the ruling clique in Tehran and indicate clearly the extremist policy goals of the regime.
"The combination of fanatical ideology, a warped sense of reality and nuclear weapons is a combination that no one in the international community can accept," Regev added, referring to allegations that Iran is developing nuclear bombs.
In Berlin, Foreign Minister Frank-Walter Steinmeier said his government had summoned the Iranian charge d'affaires to make "unmistakeably clear" its displeasure.
"I cannot hide the fact that this weighs on bilateral relations and on the chances for the negotiation process, the so-called nuclear dossier," Steinmeier said, referring to European talks with Iran on its nuclear program.
In Brussels, European Commission spokeswoman Emma Udwin said such "completely unacceptable" comments would do nothing to restore confidence in Iran. "We feel very strongly that Iran is damaging its own interests with these kind of remarks," she added.