Christian Aid was expected to be reported to the Charity Commission this week after it claimed Israeli settlers had sexually abused Palestinian children in Hebron.
The charity issued an unreserved apology following the false claims, made after social worker Miranda Pinch travelled to the West Bank.
She had worked to "monitor human rights abuses" as part of an accompaniment programme part-funded by the charity.
Ms Pinch, 59, a convert from Judaism to Christianity, returned to Britain and told Christian Aid a Palestinian headmistress had made allegations of verbal abuse. But in promoting her work, the charity reported that the headmistress had alleged "some of the children had been sexually abused on their way home" by Israeli settlers.
Zionist Federation co-vice chair Jonathan Hoffman asked the charity to explain the claims and said he would forward a complaint to the commission after they failed to reply.
Ms Pinch blamed Christian Aid for the incident, claiming a member of staff had "lost their notes" after she reported back to them. She said she had clearly explained that there was no evidence of physical sexual abuse.
She said: "I was not saying there were actual sexual attacks. I have got to be straight on this. I am not aware of any sexual abuse."
Professor Gerald Steinberg, president of NGO Monitor, said: "This is not an isolated incident but part of a series of events. Christian Aid has allowed itself to be used as a channel for some very crude anti-Israel propaganda.
"When it happens more than once then there is something more fundamental that Christian Aid needs to sort out. Almost any claim is now believed or promoted by NGOs, without anybody checking the details.
A Christian Aid spokeswoman said it had been an "unwitting and unintentional" mistake and there had been no intention to "smear" Israeli soldiers or settlers. The staff member involved "feels terrible about it", she added.