Twenty thousand Israelis have backed the lawsuit, claiming Facebook had "legal and moral obligation" to remove hateful speech. Palestinians have used the site to express rage that has led to a month of violent attacks.
The Shurat HaDin organization filed the lawsuit in a New York State court on Monday, urging the social media giant to take down over 1,000 inflammatory pages and monitor future instances more closely.
Twenty thousand Israelis have backed the motion through an online petition. The Jerusalem Post reported that the main plaintiff was a victim of a recent attack, in critical condition after being shot and stabbed on a Jerusalem bus.
If Facebook can tell what kind of coffee you drink and push ads based on your hobbies, then "they can monitor these threats and take down the posts of encouragement and glorification of terror attacks," Nitsana Darshan-Leitner, the director of Shurat HaDin, told the AFP news agency.
Israel and the Palestinian territories have been gripped by violence throughout October, as disaffected Palestinians have committed a spate of attacks - primarily stabbings - against Israelis. Ten Israelis and over fifty Palestinians have been killed.
A news release issued by the case's plaintiffs stated that many of the assailants were motivated by what "they read on Facebook - demagogues and leaders exhorting their followers to 'slaughter the Jews.'"
Israeli Prime Minister Benjamin Netanyahu called the situation "Osama bin Laden meets Mark Zuckerberg."
Facebook responded in a statement to AFP by saying: "This lawsuit is without merit and we will defend ourselves vigorously." The company denounced violent and hateful content on its site and urged users to report instances they come across.
Palestinians have responded that blaming Facebook for their frustration obscures rage built up after nearly 50 years of Israeli military occupation.