Although the initiative's name - "The Student Fund for Demolishing Israel" - brings to mind President Mahmoud Ahmadinejad's call last year to destroy the Jewish state, an organizer said its goal was to support the cash-strapped Palestinian government.
Some 300 students attended the event hosted by a group calling itself the Movement of Justice-seeking Students at the University of Tehran.
"This is a symbolic move to attract public attention to the Palestinian cause at a time when Western countries have halted financial support to the Hamas-led government," Javad Miri, the group's spokesman, told The Associated Press.
Miri said the group was collecting money that it will send it to the Hamas-led Palestinian government. "When an elected government is in power in Palestine and Israel is pressuring it, everybody should help the Palestinians."
The United States and the European Union halted most of their aid to the Palestinian Authority following Hamas' victory in Palestinian legislative elections in January, requiring that the group renounce violence and recognize Israel.
Popular campaigns to collect money for the Palestinians have been launched in several Arab countries.
'We are ready to support Palestinians by any means'
A general in the elite Revolutionary Guards, Saeed Ghassemi, struck a militaristic note in his address to the crowd. "Resistance is the only solution for Palestinians," He said. "If you abandon the sword, that will be the beginning of your end," he advised Hamas.
But the response to the call for donations was hardly overwhelming. About 10 students dropped money into a box labeled with the fund's name. They also put stones in the box in a symbolic gesture of solidarity that alluded to the first Palestinian intefadeh, or uprising, when youths pelted Israeli soldiers with rocks.
"I hope it's the start of popular financial support for the Hamas government," Einollah Zarrinjoo, 21, a male student of philosophy said.
Mahin Rezai, 20, a female Persian literature student said, "We are ready to support Palestinians by any means. Silence could make the situation worse."
In April, Iran said it would give the Palestinian Authority USD 50 million in aid. Last year, Ahmadinejad said the Holocaust was a myth and that Israel should be wiped out. Apparently taking a cue from the president, the Iranian Foreign Ministry announced plans to hold a conference to examine evidence of the Holocaust.
The hard-line Association of Muslim Journalists has also proposed a similar event. Dates have not been set for either.
Iran is currently home to about 25,000 Jews who are represented by a Jewish lawmaker in parliament. About 75,000 left the country after the 1979 Islamic revolution.