The decision to stop carrying the wines, reported Friday in the German media, had sparked fury in Israel, with Prime Minister Benjamin Netanyahu blasting a "boycott" by the German company.
But in a quick about-face, the store's management said it regretted the decision to pull the eight wines from its selection and would begin offering them again "immediately".
"In this matter, which was about a European Union recommendation, we acted too quickly and insensitively," it said in a message posted in English and German on its website.
"We regret that this wrong behaviour of the KaDeWe group led to misunderstandings and would like to apologise for this," it added, noting that it carries more than 200 Israeli products at its store in central Berlin.
"We object to any form of discrimination and intolerance."
German news website Spiegel Online had quoted a KaDeWe spokeswoman as saying Friday that the company would stop selling "Made in Israel" products that came from Jewish settlements in the Palestinian territories until their labels described their origin.
The EU move this month introduced a set of guidelines for labelling products from Jewish settlements in the Palestinian territories and annexed east Jerusalem as well as the Golan Heights, all occupied by Israel in the 1967 Six-Day War.
The settlements are deemed illegal under international law and considered a major stumbling block to peace efforts since those in the West Bank and east Jerusalem are built on land that Palestinians see as part of their future state.
However Netanyahu had likened the EU policy to the Nazi boycott of Jewish businesses.
And on Sunday he opened a cabinet meeting by noting that KaDeWe had been owned by Jews when it opened in 1907 and was later seized by the Nazis.
"Absurdly, the store is now labelling products from communities in Judea, Samaria and the Golan Heights" and removing them from the shelves, Netanyahu said, blasting the move as a "boycott in every respect".
"We strongly protest this step, which is unacceptable morally, historically and on its merits," he said.
Netanyahu also called on the German government to "act on this grave matter".
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