Middle East expert Rowan Laxton, 47, was watching TV reports of the Israeli attack on Gaza as he used an exercise bike in a gym.
Stunned staff and gym members allegedly heard him shout: 'F**king Israelis, f**king Jews'. It is alleged he also said Israeli soldiers should be 'wiped off the face of the earth'.
His rant reportedly continued even after he was approached by other gym users.
After a complaint was made to police, Mr Laxton was arrested for inciting religious hatred through threatening words and behaviour and bailed until late next month.
The maximum penalty for inciting religious hatred is a seven-year prison term or a fine or both.
Mr Laxton, who is still working normally, is head of the South Asia Group at the Foreign Office, on a salary of around £70,000.
He is responsible for all the UK's diplomacy in that area and for briefing Foreign Secretary David Miliband, who is Jewish.
Mr Laxton has worked extensively in the Middle East - he married a Muslim woman in 2000 - and has been deputy ambassador to Afghanistan.
The case could not have come at a worse time for the Foreign Office. Next week, Britain is hosting an international summit on combating anti-Semitism, with politicians from 35 countries.
Mr Laxton had gone to the London Business School's gym in Regent's Park after work on January 27.
An onlooker said: 'I was in the gym around 9pm and I heard this guy shouting something about "f**king Israelis".
'This bald guy was cycling away on his machine in the middle of the exercise room. When another guy approached him he shouted "f**king Jews, f**king Israelis".
'The gym was pretty full and everyone looked totally shocked.
' That sort of racist language is totally unacceptable. The gym staff called security and I think the guy was asked to leave.'
Mark Gardner, deputy director of the Community Security Trust which monitors anti-Semitism, said: 'There were an unprecedented number of anti-Semitic incidents during the Gaza conflict.
'This alleged case is particularly shocking, given the position held by the civil servant in question.
'We must not allow an overseas conflict to cause racism here in Britain and especially not among civil servants.
'The Jewish community will be rightly appalled to hear of these allegations against such a senior figure.
'We hope that the appropriate disciplinary actions will be taken forthwith, as they would be if these comments had been made against any other section of society.'
A Foreign Office spokesman said: 'It is too early to comment in detail on a matter that is currently the subject of police enquiries. But we take extremely seriously any allegation of inappropriate conduct on the part of our staff and continue to follow developments closely.'
When contacted by the Daily Mail, Mr Laxton denied his comments were anti-Jewish but refused to answer when asked if they were anti-Israeli.
The Oxford graduate joined the diplomatic service in 1993 and rose rapidly through the ranks.
He ran the British High Commission in Pakistan for three years before moving to Afghanistan in 2001. He stayed in Kabul for two years, then returned to London. He was appointed head of his section last year. continues here
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