The Vatican seeks to separate the bishops' status from their views
The Pope has lifted the excommunication from the Roman Catholic Church of four bishops appointed by a breakaway archbishop more than 20 years ago.
One of Archbishop Marcel Lefebvre's appointees, Briton Richard Williamson, outraged Jews by saying the Nazi gas chambers did not exist.
Two of the other three appointees are French while the fourth is Argentinean.
Israel's envoy to the Vatican said the papal decision would "cast a shadow on relations with Jews".
"We have no intention of interfering in the internal workings of the Catholic Church, however, the eagerness to bring a Holocaust denier back into the Church will cast a shadow on relations between Jews and the Catholic Church," Mordechai Lewy told Reuters news agency.
Lefebvre, who died in 1991, rebelled against liberal reforms in the Church, such as the end of the Latin Mass.
He opposed replacing the traditional Mass with services in national languages.
The Vatican said the excommunications had been lifted after the bishops affirmed their willingness to accept Church teachings and papal authority.
'No gas chambers'
Relations between the Vatican and representatives of the Jewish faith have been strained throughout much of the Church's recent history; Jewish groups have accused the wartime-era Pope Pius of turning a blind eye to the fate of the Jews in World War II.
The latest move by Pope Benedict is likely to add to those strains.
Bishop Richard Williamson recently told Swedish TV: "I believe there were no gas chambers. I think that two to three hundred thousand Jews perished in Nazi concentration camps but none of them by gas chambers."
The Vatican has distanced itself from those remarks.
But its spokesman, Rev Federico Lombardi, still stood by the decision to rehabilitate Bishop Williamson and the others.
"This act regards the lifting of the excommunications, period," he told reporters.
"It has nothing to do with the personal opinions of a person, which are open to criticism, but are not pertinent to this decree."