The paper announced the contest in response to Danish caricatures of the Prophet Mohammed that have outraged Muslims around the world.
State Department spokesman Sean McCormack reiterated U.S. support for freedom of expression, including in Iran, but condemned the Holocaust cartoon contest.
"Any attempt to mock or to in any way denigrate the horror that was the Holocaust is simply outrageous," McCormack said.
McCormack connected the contest to Iranian President Mahmud Ahmadinejad's recent anti-Israeli comments, including his dismissal of the Nazi genocide of 6 million Jews as a myth.
In its announcement, the "Hamshahri" newspaper said it wanted to test whether Western countries would extend freedom of expression to cartoons about the Holocaust.
(AFP, Reuters)