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By Thursday, that number had reportedly grown to more than 300, prompting widespread condemnation and calls for Attorney General Yehuda Weinstein to take action against the signatories on grounds of incitement to racism.
Noah Flug, head of the International Association of Holocaust Survivors, told Ynet he was shocked by the content of the letter, saying it reminded him of when the Nazis banned Jews from living near them.
"I remember the German Nazis throwing Jews out of their apartments and city centres in order to create ghettos," he told the news website.
"I remember how they wrote on benches that no Jews were allowed, and of course it was prohibited to sell or rent to Jews. We thought that in our country this wouldn't happen."
The Association for Civil Rights in Israel has called on Netanyahu to discipline state-employed rabbis who signed the letter, and Arab-Israeli lawmaker Mohammed Barakeh called for a legal investigation.
On Wednesday, around 150 demonstrators gathered to condemn the letter in a protest outside Jerusalem's Great Synagogue
Speaking to Haaretz newspaper, parliamentary speaker Reuven Rivlin described the public statement "as an embarrassment to the Jewish people, and another nail in the coffin of Israeli democracy."
Despite the condemnation, Menachem Friedman, a specialist on the Jewish world at Bar Ilan university, said there was widespread support for the views in the letter.
"They are expressing the fears of the whole population, particularly those in the poorest sectors of society," he told AFP.
"The threats that Israel faces comes from Islamism, and the hostile positions the state takes towards the Arab minority contributes to fear and creates a ghetto mentality among the Jews, even though they are the majority in Israel."
Historian Ilan Greilsammer agreed, saying the sentiments expressed in the letter were merely a reflection of what people were actually thinking.
"The rabbis are saying above what the people are thinking below. What's new is that they are expressing it publicly."
Israel has 1.3 million Arab citizens -- Palestinians who remained in the country after the creation of the Jewish state in 1948 and their descendants.