The 'painful' discovery has taken the art world by surprise, as galleries all over the world look nervously to their archives for suspect works. According to today's Jewish Chronicle, the painting, Camille Pissarro's Boulevard Montmartre, Spring 1897, comes from a large pre-war collection built up by a Breslau businessman who died in the concentration camps.
Only last month, the probable owner of the painting, Leicester widow Gerta Silberberg - the daughter-in-law of collector Max Silberberg - had a Van Gogh drawing worth £3.3m returned. The Pissarro is thought to be worth in excess of £5m. Mrs Silberberg has lived modestly in the same house for more than 40 years. She fled Germany with her husband, Alfred, in 1939.
Anne Webber, of the Commission for Looted Art in Europe, who traced the painting to Jerusalem, confirmed that it had had a series of Jewish owners since it was bought from a German collector.
She said she hoped the Israelis would follow the example of the German authorities who immediately returned the Van Gogh and a work by Van Maree also owned by the family, which were held in the old National Gallery in what was East Berlin.
'They not only saw they had a legal duty to make restitution, but a moral one as well,' she said. 'We are hoping that this matter will be resolved just as quickly. There is no doubt that the painting was owned by the Silberbergs. Even the provenance in the Israel Museum confirms that.'
James Snyder, director of the Israel Museum, said everyone at the museum felt the pain of the dilemma. 'As you can imagine, we are more aware than most of the sensitivities of the situation. We do not want this to linger on. But we have to do certain research first. This is a complicated matter as well as a painful one. This is a very good and well-known picture. It hasn't been hidden away.'
The painting was donated to the museum two years ago by the New York-based Loeb family, who bought it in 1960.
The Nazis forced the Silberbergs to break up their collection of art and furniture, thought to be worth around £20m, in 1935 in one of the infamous 'Jewish auctions'.
David Stern, himself a Jew, whose London gallery specialises in Pissarro, said the Israel Museum had to set an example for other galleries. 'It cannot expect other museums to deal with looted art if it does not.'
Stern - who is married to the artist's great-granddaughter, painter Leilia Pissarro - said the family hoped Mrs Silberberg would donate the picture to the museum so it could remain on public view.