Libai was scheduled to meet with Abu Medein to discuss the planned release of Palestinian prisoners as part of a series of confidence-building gestures called for under the Israeli-Palestinian accords.
The outrage was sparked by remarks made by Abu Medein in an interview with Israel Radio.
The Palestinian official said he could not understand why Israel was not willing to pay compensation to Palestinians who had been injured by the Israel Defense Force during the seven-year Palestinian uprising against Israeli rule in the territories, when Israel had accepted German reparations for Holocaust victims.
"While Israel accepts billions of marks from Germany, Israel refuses to give compensations to those people who lost sons or lost their eyes or lost their legs or their hands," he said.
Earlier last week the Israeli government decided that it would not issue blanket compensation to Palestinians seeking damages from intifada-related injuries, though a special committee would be set up to examine what were termed "exceptional cases."
Israeli officials said Prime Minister Shimon Peres met with the justice and finance ministers to discuss providing compensation to Palestinians for injuries suffered during the intifada.
Damage suits pending in the Israeli court system that are related to the intifada — the 1987-1993 Palestinian uprising against Israeli rule in the territories — are estimated to total hundreds of millions of dollars.
Peres and the ministers reportedly agreed to seek legislation in the Knesset giving Israel blanket immunity to the suits.
The legislation will be included in a bill on implementing the Interim Agreement, the accord signed Sept. 28 in Washington, D.C., for extending Palestinian autonomy in the West Bank.
Libai said he was shocked by Abu Medein's statements.
"It is wicked and vulgar to compare the Nazi's occupation, which systematically destroyed millions, to the Israeli control over the [West Bank] and Gaza," Libai said.
Despite his sharp criticism of Abu Medein, Libai met with other Palestinian officials for discussions about releasing Palestinian prisoners.
Among those meeting with Libai was Palestinian Authority planning official Nabil Sha'ath, who also commented on Abu Medein's controversial remarks.
"The fact that he mentioned Germany in this case is, I know, very sensitive to Israel," Sha'ath told reporters. "In no way are we accusing the Israelis of being Nazis."
The two sides agreed to release some 1,200 Palestinian prisoners this week as a goodwill gesture before the Jan. 20 Palestinian elections. Israel holds an estimated 4,000 Palestinian prisoners in its jails.
Libai said no Palestinians with Israeli blood on their hands would be freed.