Supporters of the club, which is located near one of London's biggest Jewish areas, often chant "Yid Army" and "Yiddo" at matches but fans' groups say the term is used as a badge of honour rather than as a derogatory remark.
The English game's governing Football Association warned this month that its use could lead to prosecution and a ban on attending matches but Cameron said Tottenham fans should be allowed to continue using the word - which is Yiddish for "Jew".
"There's a difference between Spurs fans self-describing themselves as Yids and someone calling someone a Yid as an insult," Cameron told the Jewish Chronicle newspaper in an interview published on its website (www.thejc.com) on Tuesday.
"Hate speech should be prosecuted — but only when it's motivated by hate," Cameron added.
His comments appear to contradict those of the FA which said that even fans who used the term as a badge of honour with no intent to offend, could still fall foul of the law.
Jewish groups say use of the word can encourage anti-Semitism from opposing fans.
"The FA considers that the use of the term "Yid" is likely to be considered offensive by the reasonable observer and considers the term to be inappropriate in a football setting," the FA said on Monday last week.
"Use of the term in a public setting could amount to a criminal offence. The FA would encourage fans to avoid using it in any situation."
Britain's 260,000-strong Jewish community is Europe's second largest and the world's fifth biggest. Many Jews have historically settled in north London, the home of Tottenham.
Cameron's comments were welcomed by Darren Alexander, joint chairman of the Tottenham Hotspur Supporters Trust.
"Our use of it is in a positive sense," Alexander, who is himself of Jewish origin, told Reuters.
"I freely admit that some Jewish people of a certain age and a certain persuasion may be offended.
"But there's a difference between when a Spurs supporter chants the word and the supporter of another club: First of all they never use the Y-word, it's always Jew this or Jew that," Alexander said, referring to what he said was genuine anti-Semitic abuse by supporters of other clubs.
Britain's Board of Deputies of British Jews, which represents the interests of the Jewish community, said it backed the FA and hoped people would stop using the term.
"We support the FA's stance in defining the ‘Y' word as an offensive term and we hope that once and for all its use will die out," vice-president Jonathan Arkush said in a statement.
(Editing by Martyn Herman)
