German Chancellor Gerhard Schroeder has cancelled his Italian summer holiday after a Rome minister labelled German tourists "hyper-nationalistic blondes".
Schroeder's trip had been planned for mid-July
Silvio Berlusconi, his Italian counterpart, responded by saying he felt "sorry" for Mr Schroeder.
A row between the two countries was re-ignited this week when Italian Tourism Minister Stefano Stefani of the far-right Northern League refused to apologise for his outspoken attack, in which he also accused Germans of being rowdy beach invaders.
It follows last week's European parliament outburst by Mr Berlusconi, who compared a German MEP to a Nazi prison guard.
Mr Schroeder will now spend his holiday in his home town of Hanover.
"Chancellor Gerhard Schroeder does not want to put his family through further speculation about the little vacation time they have together," government spokesman Bela Anda said in a statement.
The BBC's Ray Furlong in Berlin says this is the worst moment yet in the crisis that has hit German-Italian relations after Mr Berlusconi's remarks.
Two of Germany's top government figures had earlier demanded that Mr Stefani, a member of the far-right Northern League, should leave office over his remarks.
"If I were the Italian head of government, that man would no longer be in office," said Interior Minister Otto Schily, labelling the comments "obscene".
"The Italian Government would be well-advised to deal with this issue".
Economy and Labour Minister Wolfgang Clement was meanwhile quoted in the mass-selling Bild newspaper as saying Mr Stefani should be "taken out of circulation".
The calls were echoed by Italy's own left-wing opposition, which said it would seek a formal motion to remove Mr Stefani from his duties on Thursday.
Luciano Violante, who heads the Olive coalition in the lower house of parliament, said he was concerned that the row could have serious consequences for Italy's tourism industry.
And authorities in the province of Pesaro-Urbino, which Mr Schroeder had been planning to visit, said they would seek damages from the central government for lost revenue.
Meanwhile, officials appealed to other Germans expected in Italy to go ahead with their holiday plans.
Stefani has not offered an apology for his remarks
Correspondents say almost 10 million Germans visit Italy every year, making it the second most popular holiday destination for Germans behind Spain.
Mr Schily, speaking before Mr Schroeder's decision was announced, implied that Germans might vote with their feet.
"The Italians must know that there is competition for German
tourists," he said.
"Those who kick you in the shins and spit at you must not be surprised that that is not good publicity for their country."
Senior Italian ministers including Foreign Minister Franco Frattini have distanced themselves from Mr Stefani's comments.
"I am sorry," Mr Frattini said. "As far as I'm concerned, the incident was closed two days ago. Anyway, I shall still keep going to Germany."
He added that the situation would not compromise Italy's six-month EU presidency, which began last week, because the priorities it had set enjoyed "widespread support in Europe".
But neither Mr Berlusconi nor his junior minister have offered apologies for their remarks, instead choosing to express regret or clarification.
Mr Schroeder's trip to Pesaro, a resort on the Adriatic in Italy's central Marche region, had been due to start in mid-July.