The Sun published the story and the 17-second film on its website under the headline "Their Royal Heilnesses".
Buckingham Palace scolded Rupert Murdoch's top-selling Sun tabloid on Saturday for publishing a previously unknown film from 1933 that appears to show Britain's Queen Elizabeth performing a Nazi salute as a young girl.
The black-and-white film from the year Adolf Hitler came to power purports to show future British king Edward VIII instructing his nieces, the current monarch Elizabeth, aged about six or seven at the time, and her three-year-old sister, Princess Margaret, how to perform the Nazi salute.
Dancing and smiling with little apparent understanding of the salute's significance as a sign of obedience to Hitler, the two young girls are encouraged by Edward to briefly perform the raised right-arm gesture in the grounds of Balmoral Castle in Scotland.
The Sun published the story and the 17-second film on its website under the headline "Their Royal Heilnesses". Edward also raises his arm, as does his sister-in-law, the Queen Mother.
"It is disappointing that film, shot eight decades ago and apparently from Her Majesty's personal family archive, has been obtained and exploited in this manner," a Buckingham Palace spokesman said.
The Sun said the original film remained under lock and key but copies of the clip were made several years ago, one of which had been handed to the paper by a source who believed it to be of "massive public interest and historical importance".
Sun Managing Editor, Stig Abell and News Corp, owner of The Sun and the Wall Street Journal, did not immediately respond to requests for further comment.
The Sun, bought by Murdoch in 1969, prides itself on a raucous style that has made it Britain's best-selling newspaper, though critics charge it with sometimes callous reporting of everything from wars and politics to private tragedies.
In an editorial, The Sun said the images did not reflect badly on the Queen and it had published the images to provide an insight into "the warped prejudices" of Edward, who would later abdicate after just under 11 months as monarch.
Edward renounced the throne in 1936 to marry Wallis Simpson, a twice-divorced American socialite. He was succeeded by his younger brother, George VI, father of Queen Elizabeth.