The video, which depicts a family of light-skinned Jews praying before receiving a knock on the door from their darker-skinned neighbours, was published online by the Bemuna construction company.
Wearing unusual hats and lacking in social graces, the neighbours end up toasting marshmallows on the family's Hanukkah candles -- a Jewish religious holiday due to start next Sunday.
"Do you also want to live in a house of your own? Do you want neighbours to your own liking?" the voiceover adds, before the name of the building project and the company appear on the screen.
While the advert doesn't specifically mention either group, it draws on long-standing tensions between lighter-skinned Ashkenazi -- of central and eastern European descent and who have traditionally been Israel's political and economic elite -- and Sephardic Jews from the Middle East and North Africa.
The advert, since taken off the Internet, received criticism on social media. The company could not be reached for comment.
Henriette Dahan Kalev, a professor of political science specialising in racism in Israel and a co-founder of a campaign for equal rights for Middle Eastern Jews, said such overt racism was unusual but it highlighted a wider problem.
"(Racism in Israel) has become more sophisticated, more hidden, more problematic, but it is as severe as in the past," she said.
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Sephardic Jews, who make up the majority of Israel's Jewish population, have long complained of discrimination by Ashkenazis.
Tamar El-Or, professor of anthropology and sociology at Israel's Hebrew University, said steps have been made in recent decades to reduce the economic disparities between the two groups.
"And yet the stereotype... is still that academia, the arts and the economy are fully controlled by the Ashkenazi," she said.
Kalev agreed that Sephardic Jews, as well as black Ethiopian Jews, still feel discriminated against.
Earlier this year Ethiopian Jews protested in Tel Aviv and other cities against perceived prejudice and discrimination.
"You can say we have more mixed marriages, and a (military) chief of staff that is (Sephardi), but does that end racism?"
"It is like saying Obama is black so racism is finished in the United States."
El-Or said such videos could only stir tensions, accusing the company of a publicity stunt.
"How do you cause provocation? Let the genie (of racism) out," she said. "For a film made for two shekels you get millions of dollars of attention."