A rabbinical edict which prohibits Jews from renting and selling homes to non-Jews has provoked uproar across Israel.
The ruling, which has been signed by over 200 chief rabbis, is to be examined by Attorney General Yehuda Weinstein, who is looking into bringing charges of incitement.
The Abraham Fund, an Israeli Jewish-Arab co-existence organisation, said that the authorities' slow response to a similar decree issued by Safed's chief rabbi, Shmuel Elyiahu, six weeks ago, encouraged this group of rabbis to make their provocative opinions known.
"A lack of determined response by the authorities," the Abraham Fund said, "could lead to dangerous extremes in relations between Arabs and Jews."
A group of Israeli scholars, artists and writers submitted a letter to the Minister of Justice, Yaakov Neeman, on Sunday asking him to respond to the ruling and to prior cases involving incitement.
"Your thunderous silence in the long weeks that passed since Safed's rabbi, Rabbi Elyiahu, started the fire of racism," the letter said, "constitutes a grave dereliction of your duty."
Earlier last week, Prime Minster Netanyahu attacked the ruling. "These things should not be said in a Jewish and democratic state," he said. "Israel, therefore, rejects these statements." However, he did not promise an investigation into the signatories, who are employees of the state. President Shimon Peres also condemned the ruling, saying it "creates a moral crisis that touches on the substance and content of the state as Jewish and democratic".
On the political right, opinions are divided. MK Arieh Eldad of the National Union party defended the rabbis: "Before slamming them, we should examine how many Arabs live in kibbutzim, and reach the conclusion that Israel's left is adopting the same policy - hypocritically, without declaring it."
Another National Union MK, Michael Ben Ari, announced his intention to initiate legislation that would grant rabbis immunity from prosecution over religious rulings.
Demonstrations were held in Jerusalem and Carmiel; in Pardes Channa, protesters called on the municipal rabbi to resign.
A strong denunciation of the ruling was also at the centre of a 10,000-strong rally held on Friday in Tel Aviv to mark the International Human Rights Day. A letter by Eli Zvieli from Safed, who has rented out his home to Arab students despite threats aimed at him, was read out at the march: "I am 89, I've survived the Holocaust and captivity. I believed then as I still believe today, that I must safeguard my rights, that all people should safeguard their rights."
In Britain, Chief Rabbi Lord Jonathan Sacks also criticised the ruling, and added: "I hope that the great sense of outrage that the letter has unleashed will lead to its withdrawal."