"Zum Hirschen" hotel in Lam, Bavaria, refused to accommodate an Israeli couple with the sign "Jews not allowed."
According to "Bild" magazine, the couple complained to the Israeli Consulate in Munich and Booking.com.
Booking.com removed the hotel from its booking system after confirming the incident.
Israeli Consul General Talya Lador-Fresher said: "Have we really returned to the 1930s?"
The Munich prosecutor's office opened a criminal case for incitement to hatred. Hotel representatives apologized, claiming a wave of fake bookings and phishing attempts.
The manager said he receives threats daily and thought the inquiry was a fraud attempt.
Despite the dispute, the Israeli couple was invited to a free one-week stay in Upper Palatinate.
