The presumptive Republican candidate in the the US presidential race told a $25,000-a-head (£16,000) fundraising event in Jerusalem: "As I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognise the power of at least culture and a few other things."
He cited a climate of innovation, the Jewish history of thriving in adversity, and the "hand of providence".
Saeb Erekat, a senior Palestinian official, condemned Romney's comments. "It is a racist statement, and this man doesn't realise that the Palestinian economy cannot reach its potential because there is an Israeli occupation," he said.
"It seems to me this man lacks information, knowledge, vision and understanding of this region and its people. He also lacks knowledge about the Israelis themselves. I have not heard any Israeli official speak about cultural superiority."
Romney, who did not visit the West Bank while in the Holy Land, made no mention of either Israel's 45-year occupation of the West Bank and East Jerusalem, nor its continuing blockade of Gaza, both of which have had a catastrophic impact on the Palestinian economy.
The consensus of international economists, including the IMF and the World Bank, is that the Palestinian economy will fail to develop firm foundations and sustained growth until Israeli restrictions on imports, exports and the movement of goods are lifted.
Romney's comparison between the Israeli and Palestinian economies drew on figures substantially different from those cited by the World Bank. Romney said: "As you come here and you see the [gross domestic product] per capita, for instance, in Israel, which is about $21,000, and compare that with the GDP per capita just across the areas managed by the Palestinian Authority, which is more like $10,000 per capita, you notice such a dramatically stark difference in economic vitality."
According to the World Bank, however, Israel's per-capita GDP was about $31,000 in 2011, while the West Bank and Gaza's was just over $1,500.
More than 40 people attended Romney's fundraising breakfast at Jerusalem's famous King David hotel, amassing more than $1m for the Republican election campaign. The event was moved from Sunday after Romney aides realised it had been scheduled during Tisha B'Av, a Jewish day of mourning and fasting.
Sheldon Adelson, the Jewish-American billionaire casino magnate who has bankrolled Romney's presidential campaign, sat next to the candidate at a U-shaped table. Adelson also owns Israel Hayom, the Jewish state's biggest-circulation newspaper, which is a staunch supporter of Binyamin Netanyahu's government.
Among the other guests were the New York Jets owner, Woody Johnson, and the hedge fund manager Paul Singer. Donors ate a typical Israeli breakfast of salad, cheese, yoghurt and pastries.
Romney, who introduced his eldest son, Josh, to the gathering, said he had "read a number of books" on what makes countries successful.
He added: "I am overwhelmingly impressed with the hand of providence, whenever it chooses to apply itself, and also the greatness of the human spirit, and how individuals who reach for greatness and have purpose above themselves are able to build and accomplish things that could only be done by a species created in the image of God."
During a speech on Sunday delivered against the backdrop of the historic old city at sunset, Romney described Jerusalem as "the capital of Israel". Erekat said the remark was "absolutely unacceptable".
A second senior Palestinian official, Nabil Abu Rudeineh, said the statement was unhelpful to peace negotiations, pointing out it "contradict[ed] the previous positions held by the American administration".
The Palestinians claim East Jerusalem as the capital of their future state. East Jerusalem was occupied in 1967 and later annexed by Israel in a move not recognised by the international community. The future of Jerusalem is one of the most complex and delicate issues in negotiations on a possible peace agreement between Israel and the Palestinians.
All foreign embassies, including that of the US, are in Tel Aviv, with consular services based in Jerusalem. In a statement, the White House stated official policy: "The status of Jerusalem is an issue that should be resolved in final status negotiations between Israelis and Palestinians. We continue to work with the parties to resolve this issue and others in a way that is just and fair, and respects the rights and aspirations of both Israelis and Palestinians."
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