The row over the painting — Berlin Street Scene by the expressionist Ernst Ludwig Kirchner — could lead to a fundamental overhaul of the way the Government deals with art confiscated by the Nazis.

The painting was returned to the heirs of the German Jewish shoe factory owner Alfred Hess in July after almost two years of secret negotiation with the regional government of Berlin.

Within days Christie’s had announced that it would be put up for sale in New York.

“It is the most significant work of German expressionism that has ever been put up for auction,” Andreas Rumbler, of Christie’s Germany, says.

But Bernd Schultz of the Villa Grisebach auction house — one of the most influential art dealers in Germany — says there was never any real legal, or even moral, basis for handing the painting over.

“Like many other German businessmen, Alfred Hess was made bankrupt by the world economic crisis of 1929,” says Herr Schultz. “All he had left was a great art collection.” The family started to sell paintings to survive.

When the Nazis came to power in 1933 the Hess family fled to Britain. Berlin Street Scene was sent to Switzerland for sale but was eventually sold to the Frankfurt collector Carl Hagemann in 1936. After the war it was acquired by the German state and has become a cornerstone of Berlin’s famous collection of expressionist art.

The Berlin government argues that the Hess family was forced to sell because of Nazi anti-Semitic persecution and that the price was artificially low.

“One cannot doubt the racial persecution of the former owners,” said Dr Hans-Gerhard Husung, the art specialist for the Berlin government. The city was therefore obliged to return the painting to the heirs.

Not true, says Herr Schultz, who is gathering support from across the German art world, which has long felt that formerly Jewish-owned art is being surrendered without proper examination of the ownership records. “The collector Hagemann financed his art purchases with income earned from patents — he was a knowledgeable and above all an honourable man who was a lifelong friend of the painter,” Herr Schultz says.

There was no suggestion that he had cheated the Hess family, nor that he was an instrument of Nazi persecution.

The painting comes up for sale on November 8, leaving too little time to raise the estimated £13 million needed to buy the painting back for Germany and for Berlin, says Herr Schultz.

Even so, say German art market sources, some industrialists have been approached and are considering putting in a bid. “This cries out for a rescue operation,” says Herr Schultz.

The restitution wave has also been irritating the art world in Austria where a Gustav Klimt portrait was returned to a Jewish family. The Austrians tried to raise the necessary money to buy it and to keep it in a Vienna museum. But the picture was already on its way to the auction house before Austrian art lovers could be mobilised.

It was put up for auction in June and was bought by Ronald Lauder, the cosmetics tycoon, for £71 million, making it the world’s most expensive painting.

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