Tuesday, 10 April, 2001, 16:01 GMT 17:01 UK
"It is forbidden to be merciful to them. You must send missiles to them and annihilate them. They are evil and damnable," he was quoted as saying in a sermon delivered on Monday to mark the Jewish festival of Passover.
The Lord shall return the Arabs' deeds on their own heads, waste their seed and exterminate them
Rabbi Ovadia Yosef
Through his influence over Shas, Israel's third largest political party, he is also a significant political figure.
As founder and spiritual leader of the political party Shas, Rabbi Yosef is held in almost saintly regard by hundreds of thousands of Jews of Middle Eastern and North African origin.
The Palestinian Authority has condemned the sermon as racist and is calling on international organisations to treat the rabbi as a war criminal.
Rabbi Yosef said in his sermon that enemies have tried to hurt the Jewish people from the time of the exodus from Egypt to this day.
A person of Rabbi Ovadia Yosef's stature must refrain from acrid remarks such as these
Israeli Justice Minister Meir Sheetrit
Shas spokesman, Yitzhaq Suderi defended the rabbi, saying his remarks referred only to "Arab murderers and terrorists" and not the Arab people as a whole.
'Stirring up hatred'
Palestinian cabinet minister Hassan Asfur urged international civil institutions and human rights organisations to consider Rabbi Yosef a war criminal in future.
The utterances were "a clear call for murder and a political an intellectual terrorism that will lead to military terrorism", he said in remarks reported on Palestinian radio.
He added that no punishment would come from Israel "because its political culture and action are in line with [the rabbi's] racist statements".
Israeli Justice Minister Meir Sheetrit also condemned the sermon, saying: "A person of Rabbi Ovadia Yosef's stature must refrain from acrid remarks such as these."
And he added: "I suggest that we not learn from the ways of the Palestinians and speak in verbal blows like these."
Salah Tarif, the only Arab cabinet minister in the Israeli government, also criticized Rabbi Yosef, saying "his remarks add nothing but hatred".