"The racial laws were the worst mistake of a leader, Mussolini, who however did good things in so many other areas," Berlusconi, who is angling for a return to politics in elections next month, said on the sidelines of a ceremony marking Holocaust Remembrance Day in Milan.
Starting in 1938, Mussolini promulgated decrees known collectively as racial laws that barred Jews from the civil service, the armed forces and the National Fascist Party. The laws also banned intermarriage.
Italy "does not have the same responsibilities as Germany," said Berlusconi, a billionaire media tycoon known for ill-considered outbursts.
On Saturday, Chancellor Angela Merkel said Germany had "an everlasting responsibility for the crimes of (the Nazis)".
The head of Italy's Jewish community, Renzo Gattegna, slammed Berlusconi's remarks, saying they were "not only superficial and inopportune, but also... devoid of any moral meaning or historical foundation."
Gattegna, head of the Union of Italian Jewish Communities, added: "The persecution and the racist anti-Semitic laws of Italy originated well before the war and were applied with full autonomy under the... fascist regime, later an ally and willing and conscious accomplice of Nazi Germany."
He said the remarks showed "the extent to which Italy still has trouble seriously accepting its own history and its own responsibilities".
Centre-left politicians also voiced outrage over Berlusconi's comments.
"Berlusconi's words are a disgrace and an insult to history and memory. He should apologise to the Italian people today," Dario Francheschini, head of the centre-left Democratic Party, said in a Twitter message.
His party is tipped to win the elections set for February 24-25.
Left-wing MEP Debora Serracchiani said in a statement: "It is simply disgusting that even on Remembrance Day Berlusconi goes about rehabilitating the actions of the dictator who dragged Italy into the Second World War."
Antonio Di Petro, head of the small anti-corruption Italy of Values party, dismissed Berlusconi as "nothing more than a caricature" of Mussolini.
The flamboyant, scandal-plagued 76-year-old, who has had three stints as prime minister, heads the centre-right People of Freedom Party (PDL) but has not decided whether to seek a fourth term or settle for a cabinet post if the party wins in February.
The head of the PDL's parliamentary group, Fabrizio Cicchitto, came to Berlusconi's defence, saying: "The fascist dictatorship never attained the horror of that of the Nazis or the Russians."
He said the left's reactions were politically motivated and that "Berlusconi was obviously talking about (Mussolini's) social aid policies and support for families."
Berlusconi's long history of gaffes includes an earlier comment about Il Duce: "Mussolini never killed anyone. Mussolini used to send people on vacation in internal exile," he told an Italian magazine in 2003.
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