A two-month inquiry into anti-Semitism within the Labour Party has ruled that members should avoid making "Hitler, Nazi or Holocaust" comparisons when talking about the Israel-Palestine conflict, but said there should be no lifetime bans for those making anti-Semitic remarks.

The inquiry, ordered by Labour leader Jeremy Corbyn and led by former Liberty director Shami Chakrabarti, also said the party's code of conduct should be amended to "rule out all forms of prejudice", including banning the use of "Zio" and "Paki".

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The press conference announcing its findings descended into chaos, however, after Jewish Labour MP Ruth Smeeth reportedly left the room in tears when she was accused by an activist sitting in the audience of being in "collusion" with anti-Corbyn members of the press.

The activist, reportedly from the pro-Corbyn Momentum movement, had handed out deselection leaflets and refused to give one to Smeeth, warning "traitors" would be found out. He then took down her name, saying she was in cahoots with a journalist from the Telegraph newspaper.

Several witnesses said Smeeth, the MP for Stoke-on-Trent North, then left the room in tears.

There was more controversy when Corbyn appeared to compare the government of Binyamin Netanyahu to Islamic State.

In his introductory speech, Corbyn said: "Our Jewish friends are no more responsible for the actions of Israel or the Netanyahu government than our Islamic friends are responsible for Islamic State."

But the Labour leader vehemently denied he had intended to make such a comparison.

"The point is that you shouldn't say to someone that just because they're Jewish you must have an opinion on Israel, any more that you say to anyone who's a Muslim you must have an opinion on the vile actions being taken by people misquoting the good name of Islam in what they do," he said.

The report, published on Thursday (30 June 2016), insisted the Labour Party was "not overrun by antisemitism, Islamophobia or other forms of racism", adding that those making anti-Semitic or Islamophobic remarks should not be given lifetime bans.

It said: "The Labour Party is not overrun by antisemitism, Islamophobia or other forms of racism. Further, it is the party that initiated every single United Kingdom race-equality law. However, as with wider society, there is too much clear evidence (going back some years) of minority hateful or ignorant attitudes and behaviours festering within a sometimes bitter incivility of discourse.

"This has no place in a modern democratic socialist party that puts equality, inclusion and human rights at its heart. Moreover, I have heard too many Jewish voices express concern that antisemitism has not been taken seriously enough in the Labour Party and broader Left for some years."

The inquiry was announced by Labour leader Jeremy Corbyn on 29 April after the Labour Party faced accusations it had failed to combat antisemitism among its members. It followed a week that saw Naz Shah, the Labour MP for Bradford West, suspended over Facebook posts she made before being elected in 2014.

The post argued the "solution" to the Israel-Palestine conflict is to "relocate Israel into the United States", adding that "transportation costs will be less than three years of defence spending".

Livingstone took to the airwaves the following day to defend her with a series of controversial remarks linking Hitler with Zionism. The former Mayor of London was suspended but has always defended his comments as factually accurate.

The inquiry, which makes 20 recommendations in total, warned about the impact the incident had on free speech. It said: "An occasionally toxic atmosphere is in danger of shutting down free speech within the Party rather than facilitating it, and is understandably utilised by its opponents. It is completely counterproductive to the Labour cause, let alone to the interests of frightened and dispossessed people, whether at home or abroad."

Jeremy Corbyn, speaking at the launch of the report, said he would call for the inquiry's recommendations to be implemented immediately.

He said: "Under my leadership, the Labour Party will not allow hateful language or debate, in person, online or anywhere else. We will aim to set the gold standard, not just for anti-racism, but for a genuinely welcoming environment for all communities and for the right to disagreement as well. Racism is racism is racism. There is no hierarchy – no acceptable form of it. I have always fought it in all its forms and I always will.

"But while we respond to hate with universal principles we must also remember people's particular experience, if we are too ensure that not one person feels vulnerable or excluded from their natural political home.

"The Jewish community has made an enormous contribution to our Party and our country – Jewish people have been at the heart of progressive and radical politics in Britain, as elsewhere, for well over a century.

"But they are also a minority amongst minorities and have had good cause to feel vulnerable and even threatened throughout history. This should never happen by accident or design in our Labour Party.

"Modern antisemitism may not always be about overt violence and persecution, though there is too much of that even to this day. We must also be vigilant against subtler and invidious manifestations of this nasty ancient hatred and avoid slipping into its traps by accident or intent.

"For the avoidance of doubt, I do not believe in name calling and I never have. 'Zio' is a vile epithet that follows in a long line of earlier such terms that have no place in our Party. Nor should anyone indulge in the kind of stereotyping that can cause such hurt and harm.

"To assume that a Jewish friend or fellow member is wealthy, part of some kind of financial or media conspiracy, or takes a particular position on politics in general, or on Israel and Palestine in particular, is just wrong.

"Our Jewish friends are no more responsible for the actions of Israel or the Netanyahu Government than our Muslim friends are for those of various self-styled Islamic states or organisations.

"Nor should Muslims be regarded as sexist, antisemitic or otherwise suspect, as has become an ugly Islamophobic norm. We judge people on their individual values and actions, not en masse."