The bill states that administrative decisions can no longer be challenged in court after the expiration of a 30-year period — essentially preventing Jews from recovering property seized by Poland's communist-era authorities.
The legislation, which already passed Poland's lower house of parliament, still needs to be signed by President Andrzej Duda, before it can come into force.
"I condemn the legislation that was passed in the Polish Parliament today, which damages both the memory of the Holocaust and the rights of its victims," Israeli Foreign Minister Yair Lapid said.
"I will continue to oppose any attempt to rewrite history.... Poland knows what the right thing to do is — repeal the law," Lapid said in a statement.
A 2018 law which criminalizes speech suggesting Polish complicity in the Holocaust, had already put a strain on Poland-Israel relations, long before Wednesday's development.
US slams 'severe restriction'
The new law also prompted a backlash from the United States.
US State Secretary of State Antony Blinken said Washington was "troubled" by the Polish legislation "severely restricting restitution for Holocaust survivors and owners of property confiscated during the communist era."
In a statement, Blinken urged Duda not to sign the bill.
Washington's top diplomat went on to say that, until "a comprehensive law for resolving confiscated property claims" is enacted in Poland, "the pathway to compensation should not be closed for new claims or those pending decisions in administrative courts."