The rainbow flags with the Jewish symbol "made people feel unsafe", an organiser told the Windy City Times.
Laurel Grauer said she was told to leave the so-called Dyke March "because my flag was a trigger to people that they found offensive".
The organisers later hit back, saying Israel hides behind LGBT-rights.
"It was a flag from my congregation which celebrates my queer, Jewish identity which I have done for over a decade marching in the Dyke March with the same flag," Ms Grauer told Windy City Times.
Ms Grauer, who works for A Wider Bridge, which supports LGBT people in Israel, said she lost count of how many times she was verbally harassed by other marchers on Saturday.
The Dyke March takes place one day ahead of the city's official Pride March.
It is described by organisers as being a "more inclusive, more social justice-oriented" march than the city's main Pride parade.
In a social media post, the Dyke March said: "This decision was made after [the expelled marchers] repeatedly expressed support for Zionism during conversations with Dyke March Collective members."
Ms Grauer told the Times: "People asked me if I was a Zionist and I said, 'yes, I do care about the state of Israel, but I also believe in a two-state solution and an independent Palestine.'
"It's hard to swallow the idea of inclusion when you are excluding people from that," she continued.
"People are saying, 'You can be gay but not in this way.' We do not feel welcomed. We do not feel included."
In a statement, the Dyke March Collective later accused Ms Grauer's organistion of "using Israel's supposed 'LGBTQ tolerance' to pinkwash the violent occupation of Palestine".
A Wider Bridge hit back in a statement, saying: "That the organisers would choose to dismiss long-time community members for choosing to express their Jewish identity or spirituality runs counter to the very values the Dyke March claims to uphold, and veers down a dangerous path toward anti-Semitism."
They called upon the Dyke March Collective to issue a full apology.
Red State, a conservative blog, wrote: "When you're the organizer of a gay pride parade meant to celebrate 'inclusiveness,' then you're not just engaging in bigotry and anti-Semitism, but you're saying to the world you're also a giant hypocrite."

Malcolm McLaren's body was discovered in the North Lanarkshire town's Clark Street at about 10:25 on Thursday.
Police Scotland said forensic teams have examined the scene and officers were gathering CCTV footage from the area.
They have also been carrying out door-to-door inquiries for any information which could assist the investigation.
Det Ch Insp Paul Livingstone, who is leading the inquiry, said: "Extensive inquiries have been ongoing with specialist officers and forensics teams conducting examinations at the scene.
"We are working to establish a motive for this murder and we are in the process of piecing together Mr McLaren's movements in the days leading up to his death.
"Inquiries so far have revealed that he was in Airdrie town centre around 1500 hrs on Wednesday afternoon before making his way home to Clark Street.
"It's important we establish Mr McLaren's movements from then on, where he went, who he saw, who he met. So, if anyone has any information or was in town centre or Clark Street on Wednesday afternoon, please do get in touch with us. Your information could prove vital in our inquiries."

The Isle of Man Met Office predicts wind speeds could reach up to 55mph (88km/h) later and on Thursday.
The 08:45 GMT sailing between Douglas and Heysham and the 14:15 are affected, the Isle of Man Steam Packet Company said.
A spokesman said the 19:45 and overnight service could also face disruption or cancellation.
Affected passengers have been asked to contact the company.
The Met Office has issued a yellow warning for cold and windy weather on Wednesday, Thursday and Friday, with a "likelihood of hail, snow and temperatures close to zero".
It has also issued a flood warning for Peel promenade at high tide at 10:15.
Organisers of an LGBT-rights festival in Chicago are being accused of anti-Semitism after they expelled marchers carrying the Star of David.
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A murder investigation is underway after the body of a 40-year-old man was found in a flat in Airdrie.
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Strong winds have led to the cancellation of two ferry crossings between the Isle of Man and Lancashire.