A senior official in Jerusalem told the BBC the charges were rubbish, saying Israel had no need to spy on the US.
The denial came after the Pentagon said an official was under investigation for allegedly passing on secret material relating to US policy towards Iran.
The suspected spy is said to have links to Douglas Feith, a key adviser to Defence Secretary Donald Rumsfeld.
This is a very, very serious allegation
Mr Feith, along with Deputy Defence Secretary Paul Wolfowitz, is believed to have played a key role in planning the US invasion of Iraq in 2003.
An arrest could be made as early as next week, according to an official interviewed by the Associated Press news agency.
'Directive leaked'
The BBC's Nick Childs in Washington says this is potentially a very serious development, because Israel is one of America's closest allies.
Pollard is serving a life sentence for espionage
However, he adds that Israel has been accused of spying on the US before.
A former Jewish-American US Navy intelligence analyst, Jonathan Pollard, was arrested in 1985 and sentenced to life imprisonment.
Citing unnamed sources, American TV network CBS reports that the alleged Pentagon spy handed over the draft of a US presidential directive concerning policy towards Iran last year.
"This put the Israelis - according to one of our sources - inside the decision-making loop so they could try to influence the outcome," the report said.
The senior Democrat on the US House of Representatives' Armed Services Committee, Ike Skelton, said he was deeply "concerned and angered" by the espionage reports.
"This is a very, very serious allegation and we just can't tolerate anything like this at all," he said.
'Baseless claim'
The investigation into the alleged spy apparently involved the use of electronic surveillance devices, including wire taps.
An anonymous security official interviewed by AP appears to confirm a claim in the CBS report that the suspect is thought to have passed on the classified information to a pro-Israel lobby group, the American Israel Public Affairs Committee (Aipac).
However, Aipac spokesman Josh Block said the claim was "baseless and false".
He said the group "would not condone or tolerate for a second any violation of US law or interests".
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