Friends of the Thuringian Sausage, an association that runs a museum in honor of the regional delicacy, aimed to relocate the building on land where the Nazis held prisoners during World War Two before shipping them to the Buchenwald camp, located in present-day Germany.
Reinhard Schramm, head of the Jewish community in Thuringia, home to some 800 Jews, said he was "shocked and irritated" by the plan's "total lack of sensitivity."
"We are in talks with city officials and hope we can find a solution that honors the victims."
The site of the former holding camp lies on the outskirts of the city of Muehlhausen, some 80 km (50 miles) northwest of Buchenwald.
Muehlhausen's mayor, Johannes Bruns, said on Friday the city council was exploring an alternative location for the sausage museum.
The former subcamp is located on a patch of land that a private investor bought from the government in 2008.
As well as the museum, the investor wants to build a theater and a hotel there. One idea being considered was to ensure the new project included some kind of memorial to Holocaust victims.
A spokesman for the First German Sausage Museum, currently located in Holzhausen, 60 km south of Muehlhausen, did not respond to an email asking for comment. The museum had announced plans to move to Muehlhausen on Wednesday.
Thuringian sausages, usually made with pork mince, caraway, marjoram and garlic, are among the most famous of the more than 1,500 sausage varieties made in Germany.