The chief Rabbinate of Israel sent a letter to the Vatican saying that dialogue with Catholics could not continue as before "without a public apology from Bishop Williamson and recanting his deplorable statements".
The Rabbinate said it would not attend a meeting scheduled for March "until this matter is clarified".
Chief Vatican spokesman Father Federico Lombardi said he hoped the pope's words at the audience would be "sufficient to respond to the doubts expressed about the position of the pope and the Catholic Church" on the Holocaust.
Lombardi said he hoped the Israeli Rabbinate would now rethink its position and continue "fruitful and serene dialogue".
British-born Richard Williamson, one of four traditionalist bishops whose excommunications were lifted on Saturday, has made several statements denying the full extent of the Holocaust of European Jews, as accepted by mainstream historians.
Williamson told Swedish television: "I believe there were no gas chambers" and only up to 300,000 Jews perished in Nazi concentration camps, instead of 6 million. His comments caused an uproar among Jewish leaders and progressive Catholics, many of whom said it had cast a dark shadow over 50 years of Christian-Jewish dialogue.
Pope Benedict has given credence to "the most vulgar aspect of anti-Semitism" by rehabilitating a Holocaust-denying bishop, said Elie Wiesel, the death camp survivor, author and Nobel Peace Prize winner.
In an exclusive interview with Reuters, Wiesel also said there was no way the Vatican could have not known about the bishop's past and it may have been done "intentionally".
"What does the pope think we feel when he did that? That a man who is a bishop and Holocaust denier - and today of course the most vulgar aspect of anti-Semitism is Holocaust denial - and for the pope to go that far and do what he did, knowing what he knows, is disturbing," Wiesel said by phone from New York.
"The result of this move is very simple: to give credence to a man who is a Holocaust denier, which means that the sensitivity to us as Jews is not what it should be," he said late on Tuesday.
"It's a pity because Jewish-Catholic relations, thanks to John XXIII and John Paul II, had never been as good, never in history," Wiesel said, referring to the popes who revolutionized relations with Jews after 2,000 years of persecution and mistrust.
Vatican 'had to know'
Asked if he believed it was possible that the Vatican did not know that Williamson was a Holocaust denier, Wiesel, who won the Nobel in 1986 and survived Auschwitz and Buchenwald, said, "Oh no! The Church knows what it does, especially on that level for the pope to readmit this man, they know what they are doing. They know what they are doing and they did it intentionally. What the intention was, I don't know."
Since the fury over the pope's decision to lift the excommunication, the Vatican has condemned Williamson's comments as "grave, upsetting (and) unacceptable", restating the Church's -- and Benedict's -- teachings against anti-Semitism.
Wiesel said he could not offer the Vatican any advice on how to put things right with Jews but something had to be done.
On Tuesday, Williamson's superior in the traditionalist movement publicly apologised to the pope and said William had been disciplined and ordered to remain silent on political or historical issues.
Pope Benedict on Wednesday reaffirmed his "full and unquestionable solidarity with Jews" in an attempt to relieve tensions with Jews after a Catholic bishop denied the Holocaust.
Speaking at his Wednesday audience, the pope said the attempt to exterminate the Jews in the Holocaust should remain a warning for all people.