The party said a group of 19 have formed “Jews in the AfD”, and that anyone joining must be a card-carrying member of the party who is either ethnically or religiously Jewish.
The move drew a backlash from Germany's Jewish community, which blasted the AfD as a “racist and anti-Semitic party”.
Some 250 people, many from Jewish organisations, also held a protest Sunday in Frankfurt against the new group, which was launched in nearby Wiesbaden.
“You won't get a Kosher stamp from us,” said Dalia Grinfeld, who heads the Jewish students Union in Germany, at the protest.
At the inauguration ceremony of the new group, Jews in the AfD leader Wolfgang Fuhl told reporters: “We are not a religious organization, we are a political organization.”
He said people wishing to join had to meet two requirements: membership in the AfD and ethnic or religious association with the Jewish faith.
Leading members of the AfD have come under fire repeatedly for comments that appear to play down the Holocaust.
Party co-leader Alexander Gauland in June described the Nazi period as a mere “speck of bird shit in over 1,000 years of successful German history”.
Another leading AfD politician, Björn Höcke , has criticised the sprawling Holocaust memorial in Berlin, branding it a “monument of shame”.
But Fuhl dismissed those concerns on Sunday, saying the AfD was the most pro-Israel party in Germany, not least because it supports the Jewish state’s right to have all of Jerusalem as its capital.
“The AfD is an exceptionally pro-Israel party,” Fuhl said.
Ahead of Sunday's launch, Jewish organisations including the Central Council of Jews in Germany issued a statement condemning the AfD.
“The AfD is a party that provides a home for hatred for Jews as well as the relativizing, or even denial of the Holocaust,” it said.
The AfD's deputy parliamentary group leader Beatrix von Storch hit back in an interview published Sunday by broadsheet Welt am Sonntag.
Taking aim at the Central Council of Jews, von Storch compared it to “official churches”, which she dismissed as “part of the establishment.”
The AfD positions itself as a group offering voters an “alternative” to mainstream established parties.
Capitalizing on discontent over an influx of asylum seekers in 2015-2016, the AfD is now the biggest opposition party in Germany with over 90 seats in parliament.
The deputy parliamentary group leader of Chancellor Angela Merkel's CDU party, Stephan Harbarth, called the AfD's bid to start a Jewish wing “hypocrisy”.
“Whoever calls the Holocaust a speck of bird shit in German history does not fight anti-Semitism, but mocks its victims, and definitely does not stand on the side of the Jews,” Harbarth told Sunday's edition of daily Bild.