The navy-and-white striped "sheriff shirt" behind the clothing controversy features horizontal stripes and a six-pointed gold star.
"The design of the shirt was inspired uniquely by the sheriff's star in the classic movies about the American West, as the text (on the website) states," a spokesperson for Inditex, which owns fashion brand Zara, told The Local.
However, the Turkish-made garment for children was "hauntingly reminiscent" of a concentration camp uniform replete with the Star of David sign used by Nazis to identify Jewish prisoners in their Second World War camps, according to Israeli newspaper Haaretz.
Made in Turkey, the shirt priced at €10.95 ($14.50) in Spain, was originally available in Zara online stores in countries including Israel, France, Albania and Sweden, according to Israel journalist Dimi Reider.
"It’s a SHERIFF shirt for your three-year-old. Obviously. What else could it be?", wrote Reider on his blog 972.
Zara told The Local they had since apologized for the error via Twitter , and that the item in question was no longer on sale.
"It's a very sensible response on the part of Zara in relation to what we perceive to be a lack of good judgement by their buying department," Martin Nathan, vice president of the Jewish community of Marbella told The Local.
Pictures of the shirt, however, still appear on various Zara country pages.
Zara in Israel may also have unintentionally made the situation worse with a statement saying the garment would now be "exterminated", according to the 972 blog.
In the Hebrew-language statement from the company's Israel offices, the word used for "exterminated" was the same as Hebrew term for the Nazi's genocidal practices, said the blog's author.
The sheriff shirt row is not the only scandal to hit Zara in recent days: the clothing company has also been labelled as "racist" by US Twitter users after choosing to stock a t-shirt bearing the slogan "White is the new black".
"With all the uproar about cultural appropriation, did you really think it was a good idea to print a ‘White is the New Black’ shirt?’ Twitter user @QFTPC was quoted as saying by the New York Post.
Zara owned by Europe’s richest man Amancio Ortega, is part of Spain’s Inditex group, which owns brands including Pull&Bear, Bershka and Massimo Dutti.
The group has over 6,700 stories in 87 countries, including 22 in Israel, and notched up net income of €2.4 billion in the 12 months to January 2014.
@n_rothschild We honestly apologize, it was inspired by the sheriff’s stars from the Classic Western films and is no longer in our stores
— ZARA (@ZARA) August 27, 2014