Some 40 Western diplomats walked out of the room when Ahmadinejad said Israel was created on the "pretext of Jewish suffering" from the Second World War.
"In fact, in compensation for the dire consequences of racism in Europe, they helped bring to power the most cruel and repressive racist regime in Palestine," Ahmadinejad said.
In his speech, Ahmadinejad pointed the finger at the United States, Europe and Israel (whose government he called "racist perpetuators of genocide") and said they were destabilizing the entire world.
Norway's foreign minister says the Iranian leader's comments "run counter to the very spirit of dignity of the conference."
Ahmadinejad's comments were greeted with applause from some delegations that remained.
Just as Ahmadinejad began addressing the U.N. Anti-Racism Conference, there was a brief demonstration by two men dressed as clowns and wearing multi-colored wigs. They pronounced the conference a "circus," and one protester shouted, "Racist! racist!" and threw a soft red object at Ahmadinejad, hitting the podium.
Other hecklers shouted from the hall. One member of the UEJF (Union of French Jewish Students) shouted and held up a sign saying, "This is a circus; a racist can't fight racism."
Ahmadinejad responded, "I call on all distinguished guests to forgive these ignorant people, they don't have enough information."
The United States, Canada, Israel and several other countries are boycotting the meeting over concerns that it would be used as a platform for criticism of Israel.
On Monday, Israel said it was recalling its ambassador to Switzerland in protest of the conference being held in Geneva, and in anger over a meeting that Swiss President Hans-Rudolf Merz held on Sunday with Ahmadinejad.
Ironically, the first day of the conference coincides with Holocaust Remembrance Day in Israel.
Israeli Prime Minister Benjamin Netanyahu told his cabinet that the conference which is purportedly against racism, has a guest of honor who is a racist.
Earlier, U.N. Secretary-General Ban Ki-moon urged the world to rally against the threat that intolerance could rise as a result of the economic crisis, saying "the time is now" to stamp out racism.
Ban, opening the global body's first racism conference in eight years, said racism including anti-Semitism and Islamophobia needed to be tackled.
"I fear that today's economic crisis, if not handled properly, could evolve into a full-scale political crisis marked by social unrest, weakened governments and angry publics who have lost faith in their leaders and their own future," the U.N. chief said.
"In such circumstances, the consequences for communities already victimized by prejudice or exclusion could be frightening."
"There comes a time to reaffirm our faith in fundamental human rights and the dignity and worth of us all," Ban told the gathering of thousands of ministers, diplomats and dignitaries at the U.N.'s European headquarters in Geneva.
The administration of Barack Obama, America's first black president,it would boycott the week-long meeting because it makes reference to a declaration made in 2001 at the global body's first racism conference in Durban, .
That document was agreed after the United States and Israel walked out over attempts to liken Zionism - the movement establishing a Jewish state in the Holy Land - to racism.
Organizers have sought to steer clear of the controversies that marred the Durban meeting, but have run into many of the same contentious issues., , , Israel, , , and are also not participating, while 's hardline President Mahmoud Ahmadinejad was scheduled to take the floor on the conference's first day.
The major sticking points in the draft final declaration prepared for the current meeting concern its implied criticism of Israel and an attempt by Muslim governments to ban all criticism of Islam, Sharia law, the prophet Muhammad and other tenets of their faith.
Mr. Obama, speaking in Trinidad on Sunday after attending the Summit of the Americas, said: "I would love to be involved in a useful conference that addressed continuing issues of racism and discrimination around the globe."
But he said the language of the U.N.'s draft declaration risked a reprise of Durban, during which "folks expressed antagonism toward Israel in ways that were often times completely hypocritical and counterproductive."
"We expressed in the run-up to this conference our concerns that if you adopted all of the language from 2001, that's not something we can sign up for," Mr. Obama said.
Ban said no society - rich or poor, large or small - is immune to the dangers of racism, which he called a "denial of human rights, pure and simple."
Addressing intolerance in its various forms, Ban said racism "may be institutionalized, as the Holocaust will always remind us," but that it may manifest itself in more subtle forms through the "hatred of a particular people or a class - as anti-Semitism, for example, or the newer Islamophobia."
Many Muslim nations want curbs to free speech to prevent insults to Islam they claim have proliferated since the terrorist attacks in the United States on Sept. 11, 2001. They cite the 2005 cartoons of Muhammad published by a Danish newspaper that sparked riots in the Muslim world, and allegations that authorities in the West have targeted innocent Muslims through anti-terror and other police action.
Those demands had been largely resisted by the United States and other Western nations, some of whom are participating in the conference.
Ban steered clear of the issue of a global ban on religious defamation, as demanded by Muslim nations, but urged action against a "new politics of xenophobia" that is on the rise and could become dramatically worse as a result of new technologies that proliferate hatred.
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