He also called for the Jewish state to be moved as far away as Alaska.
"They have invented a myth that Jews were massacred and place this above God, religions and the prophets," said President Ahmadinejad, in a speech carried live on state television.
"If somebody in their country questions God, nobody says anything, but if somebody denies the myth of the massacre of Jew, the Zionist loudspeakers and the governments in the pay of Zionism will start to scream," he said.
"Our proposal is this: give a piece of your land in Europe, the United States, Canada or Alaska so they can create their own state," he said, in a speech to thousands of people in the southeastern province of Sistan-Baluchestan.
"Be certain that if you do that, the Iranian people will no longer protest against you and will support your decision."
Israel has responded by calling on the world to "open its eyes" to the Iranian regime and its nuclear program.
"We hope these extremist comments by the Iranian president will make the international community open its eyes and abandon any illusions about this regime," said foreign ministry spokesman Mark Regev, speaking to AFP.
"Israel is calling once more for Iran's nuclear program to be submitted by the International Atomic Energy Agency to the UN security council", and for sanctions to be imposed, he said.
The Iranian leader's comments underline the danger his regime poses and the country's nuclear capacity to the world.
Mr Ahmadinejad has already sparked international outrage over a string of anti-Israeli outbursts, in October calling for Israel to be "wiped off the map", and last week describing the country as a "tumour" that should be moved to Germany or Austria.
But his latest comments are the clearest yet that he is a denier of the Holocaust -- Nazi Germany's systematic slaughter of an estimated six million Jews between 1933 and 1945.
"If you say it is true that you massacred and burned six million Jews during the Second World War, if you committed this massacre, why should the Palestinians pay the price?" Mr Ahmadinejad asked.
"Why, under the pretext of this massacre, have you come to the heart of Palestine and the Islamic world..., why have you created an artificial Zionist regime?" the president said.