The image, which shows Netanyahu holding a trowel dripping blood, was published on Holocaust Memorial Day and carried the caption "Israeli elections. Will cementing peace continue?"
The Board of Deputies of British Jews said the cartoon was "shockingly reminiscent of the blood libel imagery more usually found in parts of the virulently anti-Semitic Arab press".
The so-called "blood libel" - accusations that Jewish peoples murder children and use their blood in rituals - go back centuries and have led to persecution and attacks.
The wall image by the weekly paper's cartoonist Gerald Scarfe was a reference to the barrier that Israel has been building for a decade on West Bank territory.
The project was launched at the height of a Palestinian uprising and was billed as a way to stop suicide bombers from penetrating the country, although rights groups say nearly 85 percent of the wall's route runs through the West Bank, annexing Palestinian land.
The Sunday Times's acting editor was due to meet Jewish community leaders in Britain on Tuesday to express his regrets over the cartoon, said a spokesman for Murdoch's News International, the paper's publisher.
Murdoch said Scarfe had never reflected the opinions of the Sunday Times. "Nevertheless, we owe major apology for grotesque, offensive cartoon," he said in a Twitter message.
The Board of Deputies, representing Jewish communities in Britain, said it had lodged a complaint over the image with the Press Complaints Commission, an industry-run watchdog.
"Its use is all the more disgusting on Holocaust Memorial Day, given the similar tropes leveled against Jews by the Nazis," the board added.
The paper denied the cartoon was anti-Semitic, saying it was aimed at Netanyahu and not the Israeli people. It said the timing of its publication was linked to the victory of Netanyahu's party in last week's Israeli elections.
"The last thing I or anyone connected with the Sunday Times would countenance would be insulting the memory of the Shoah (the Holocaust) or invoking the blood libel," said Martin Ivens, who was appointed as the paper's acting editor earlier this month.
"We are however reminded of the sensitivities in this area by the reaction to the cartoon and I will of course bear them very carefully in mind in future," he added.
Ivens was expected to tell Jewish leaders that the cartoon was a case of "bad taste and extremely bad timing", the News International spokesman said.
Scarfe told Britain's Jewish Chronicle he had been unaware it was Holocaust Memorial Day on Sunday and regretted the timing of the cartoon's publication.
LONDON (Reuters) -- Rupert Murdoch apologized on Monday for a "grotesque" cartoon in his London-based Sunday Times newspaper depicting Israeli Prime Minister Benjamin Netanyahu building a bloody wall trapping the bodies of Palestinians, after complaints from Jewish groups.