The German defence ministry has said a video in which an army recruit is told to imagine shooting at black people was "completely unacceptable".
Ministry spokesman Thomas Raabe said such behaviour contradicted Germany's military standards.
In the 90-second video, the recruit is ordered to pretend he is in New York's Bronx facing hostile African Americans.
New York officials and US civil rights leaders have condemned the footage, which was shown on national television.
The video first appeared on a German website, from which it has since been removed.
The footage shows the instructor telling the soldier: "You're in the Bronx, a black van pulls up in front of you and three African-Americans get out and start really insulting your mother... act!".
The soldier then fires his gun several times and shouts obscenities in English, as the instructor encourages him to curse even louder.
The clip was filmed in a forest in July 2006, near the barracks of the northern German town of Rendsburg .
"This behaviour is absolutely unacceptable and contradicts the training standards of the German army," Mr Raabe said.
The German army said it has been aware of the video since January and was investigating it.
US civil rights leader, Al Sharpton, said it was outrageous to depict blacks as "target practice".
New York officials say they are saddened and frustrated that the Bronx district is depicted so negatively.
"Clearly these folks don't know anything about African-Americans or the Bronx," said Bronx borough president Adolfo Carrion Jnr, who recently returned from a trip to Germany to promote tourism to the district.
He has demanded an apology from the Germany military over the clip.
It is the latest in a series of scandals to hit the German military.
A group of 18 army instructors are on trial in the country accused of abusing and humiliating recruits during training in 2004.
Last year, German newspapers published images of German soldiers serving in Afghanistan posing with skulls.