The fight centres on the Guelph Treasure or "Welfenschatz" of gold, silver and gem-studded relics believed to be worth hundreds of millions of euros in total.
The now 44-piece collection, the largest German church treasure in public hands, is kept in a Berlin museum overseen by the Prussian Cultural Heritage Foundation.
The case comes at a sensitive time after news last year of a vast trove of long-lost art found in a Munich flat sparked complaints of German foot-dragging on returning Nazi loot.
The state-backed Limbach Commission found that the former Jewish owners did not sell the Welfenschatz treasure under duress and received a fair market price from the state of Prussia.
The body said it was "aware of the severe situation of the art dealers and their persecution in the Nazi era".
But it added that it saw no evidence of "a persecution-induced forced sale" and that the price "corresponded to the situation on the art market after the world economic crisis" following the 1929 stock market crash.
The panel — whose rulings are non-binding but are seen to carry moral weight — said "it can therefore not recommend the return of the Welfenschatz to the heirs of the four art dealers and any other former co-owners".
State Culture Minister Monika Gruetters said that, although the German government in many cases favoured restitution, in this case she "hopes that the Jewish heirs will accept the recommendation of the commission".