And in Gaza City, the Islamist Hamas movement that has ruled the impoverished Palestinian territory since June 2007 marked the day by calling for more suicide attacks on Israel.
The book "Holocaust," published by members of Iran's Islamist Basij militia, features dozens of cartoons and sarcastic commentary.
Education Minister Alireza Ali-Ahmadi attended the official launch of the book in Tehran's Palestine Square.
The cover shows a Jew with a crooked nose and dressed in traditional garb drawing outlines of dead bodies on the ground.
Inside, bearded Jews are shown leaving and re-entering a gas chamber with a counter that reads the number 5,999,999.
Another illustration depicts Jewish prisoners entering a furnace in a Nazi extermination camp and leaving from the other side as gun-wielding "terrorists."
Yet another shows a patient draped in an Israeli flag and on life support breathing Zyklon-B, the poisonous gas used in the extermination chambers.
Iran does not recognise the Jewish state, and President Mahmoud Ahmadinejad has attracted international condemnation by repeatedly predicting Israel is doomed to disappear and branding the Holocaust a "myth."
The commentary inside the book includes anti-Semitic stereotypes and revisionist arguments, casting doubt that the massacre of Jews took place and mocking Holocaust survivors who claimed reparations after World War II.
One comment, in a question-and-answer format, reads: "How did the Germans emit gas into chambers while there were no holes on the ceiling?" Answer: "Shut up, you criminal anti-Semite. How dare you ask this question?"
In 2006, the Islamic republic hosted a conference of Holocaust deniers and revisionists and a mass-circulation Iranian newspaper held a cartoon competition on the subject.
On Friday, tens of thousands of Iranians marched in Tehran, chanting "Death to Israel," declaring solidarity with the Palestinians and calling for Jerusalem and Israel to be handed to the Palestinians.
Demonstrators carried placards bearing slogans including "Israel will be destroyed, Palestine is Victorious" and "Holy war until victory," and they also torched American and Israeli flags.
In Gaza, a Hamas parliamentarian called for more suicide attacks against Israel as thousands of Palestinians marched to mark Al-Quds Day.
"We call on all the factions to undertake efforts to contain the enemy and halt its aggression by planning martyrdom operations," Ahmed Abu Helbiya told a crowd of more than 2,000 protesters.
Friday's Iran protest follows a fresh verbal attack on Israel by Ahmadinejad.
In an address to the UN General Assembly in New York on Tuesday, he said "the Zionist regime is on a definite slope to collapse and there is no way for it to get out of the cesspool created by itself and its supporters."
Quds Day was started by the late Ayatollah Ruhollah Khomeini, founder of the Islamic republic, who called on the world's Muslims to show solidarity with Palestinians on the last Friday of the fasting month of Ramadan.
The demonstration was held under an official slogan: "The Islamic world will not recognise the fake Zionist regime under any circumstances and believes that this cancerous tumour will one day be wiped off the face of the earth."