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CAIRO (Reuters) - Egypt on Saturday said a new Israeli law giving Jews the exclusive right to self-determination in the country undermined the chances for peace in the Middle East and the right of Palestinian refugees to return to their homes.

The law, which was passed on Thursday, has drawn rebuke from the European Union and was denounced by the Palestinian Authority and Arab citizens of Israel as racist legislation.

"The Arab Republic of Egypt announces...its rejection of the law passed by the Israeli Knesset on the "national state for the Jewish people" law ... for its ramifications that consecrate the concept of occupation and racial segregation," the Egyptian foreign ministry said in a statement.

"It undermines the chances for achieving peace and reaching a just and comprehensive solution for the Palestinian issue," it said.

It said the law would also have a potential impact on the right of Palestinians displaced from their homes in 1948 when Israel was founded, and their descendants, to return to their homes under United Nations resolutions.

Egypt in 1979 became the first Arab country to forge a peace treaty with Israel under the U.S.-sponsored Camp David accord that provided for the Jewish state to withdraw from the Sinai Peninsula.

But relations between two countries remained lukewarm, with Egypt demanding that Israel quit other lands it occupied in the 1967 Middle East war, including the Syrian Golan Heights, the West Bank and Gaza Strip and Arab East Jerusalem.

On Friday, Egypt's al-Azhar Mosque, the most prestigious Sunni Muslim institution, denounced the Israeli law calling it "a step that reflects repugnant racism".

(Reporting by Ahmed Tolba, writing by Sami Aboudi)

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Reuters