Israeli security officials have been told to stop making Arab construction workers at the Knesset wear distinctive identifying marks on their hard hats.
Red cross marking were for security reasons, said Knesset officials
Israeli parliamentary speaker Reuven Rivlin, ordered an end to the controversial policy.
The Arab builders had been made to wear helmets with red crosses on top so they were identifiable to marksmen guarding parliament, reported the Maariv Daily.
The practice outraged local politicians and human rights groups.
"Even though Israel is dealing with various security issues... it must not use any signs that are liable to be interpreted as distinguishing people on the basis of race, nationality or religion," Mr Rivlin said in a statement.
Of the 200 or so labourers employed to build a new wing at the Israeli parliament building, 25 are Israeli Arabs.
Knesset spokesman Giora Pordes said only Arab workers who had not yet completed the lengthy security checks wore marked helmets.
Arabs who had been cleared wore plain helmets, he said.
The markings enabled the Arab labourers to start work immediately, rather than wait the three to four months before checks are completed, he added.
But the practice sparked outrage.
The Israeli office of the Anti-Defamation League (ADL) - founded to combat anti-Semitism - described it as discriminatory and ironic.
"While it is understandable that all workers at sensitive sites such as the Knesset have full and thorough security checks, it is both discriminatory and insensitive to visibly mark certain individuals based on race, religion or nationality, regardless of security concerns," it said in a statement.
Ahmed Tibi, an Arab legislator, told Reuters news agency it was symptomatic of a "virus of racism" that has infected Israeli society.