"The Echo brand is so badly damaged that a complete new beginning is necessary," said Germany's Music Industry Association, adding that the "Echo will be no more."
A maelstrom of outrage has erupted after the Echo's Hip-Hop/Urban prize was handed this month to rap duo Kollegah and Farid Bang, who in their song "0815" say their bodies are "more defined than Auschwitz prisoners".
The prize, which is based on sales, had gone to the act after they sold more than 200,000 copies of their album "Young, Brutal and Handsome 3".
Star conductor Daniel Barenboim this week became the latest high-profile musician to return an earlier Echo award in protest.
Barenboim, 75, said in a statement that the rappers' lyrics are "clearly anti-Semitic, misogynist, homophobic and contemptuous of human dignity".
The award's organizers noted that while the "events surrounding this year's awards... cannot be reversed, we want to ensure that such a mistake does not repeat itself".
Germany has been shocked by several recent anti-Semitic incidents, including an assault by a Syrian refugee on two men wearing Jewish kippa skullcaps in Berlin.
On Wednesday, Germans staged shows of solidarity with Jews after the incidents that raised pointed questions about Berlin's ability to protect its burgeoning Jewish community seven decades after the Holocaust.