The ministry called it a step of historical justice.
"Israel welcomes the decision of the Government of Lithuania to establish a reparation fund for the management of Jewish property nationalized and confiscated by the totalitarian regimes," Israel's Ministry of Foreign Affairs said in a statement.
"The decision implements the law approved by the Lithuanian parliament on this issue, and constitutes an important step of historical justice for the Lithuanian Jewish community, which was almost entirely annihilated by the Nazis and their local accomplices," the ministry added.
On Wednesday, Lithuania's government appointed a fund to administer compensation for property owned by Lithuanian Jewish communities and nationalized by totalitarian regimes.
The move will allow to implement a law adopted by the Lithuanian parliament last year. The law stipulates that 128 million litas (EUR 36.5 million) are to be transferred to a special fund over the course of ten years. The money will be spent on Jewish education, religious, scientific, cultural, healthcare and other projects with public benefits.
3 million litas are allocated for victims of the Holocaust and Stalin's regime in this year's budget.
The Lithuania government's decision was earlier welcomed by representatives of the U.S. administration.
More than 90 percent of Lithuania's pre-war Jewish community of about 200,000 were annihilated by the Nazis and their local collaborators during World War II. Around 5,000 Jewish people currently live in Lithuania, according to the Jewish community.