Further developments: Xymphora has a good summary of this story here , as does Joseph Cannon

It is encouraging that the propaganda and lies are being discredited almost as fast as they come out--rather than after the war--but, as they say, a lie can travel half-way around the world while the truth is still putting on its boots.

Juan Cole has this to say:

It is typical of black psychological operations campaigns that they begin with a plant in an out of the way newspaper that is then picked up by the mainstream press. Once the Jerusalem Post picks it up, then reporters can source it there, even though the Post has done no original reporting and has just depended on the National Post article, which is extremely vague in its own sourcing (to "human rights groups").

This affair is similar to the attribution to Iranian President Mahmoud Ahmadinejad of the statement that "Israel must be wiped off the map." No such idiom exists in Persian, and Ahmadinejad actually just quoted an old speech of Khomeini in which he said "The occupation regime over Jerusalem must vanish from the page of time."

Update: The first link below is no longer good. The story is "no longer available, (which means that Matt Drudge has a dead link at the top of his site)" It looks like it has been pulled.

IRAN EYES BADGES FOR JEWS, CHRISTIANS

So says this story, linked to by WorldNetDaily and Drudge. Shades of Nazi Germany.

but....

Report of Iran Badges for Non-Muslims 'Not True'

The National Post is sending shockwaves across the country this morning with a report that Iran's Parliament has passed a law requiring mandatory Holocaust style badges to identify Jews and Christians.

But independent reporter Meir Javedanfar, an Israeli Middle East expert who was born and raised in Tehran, says the report is false."It's absolutely factually incorrect," he told The New 940 Montreal."Nowhere in the law is there any talk of Jews and Christians having to wear different colours. I've checked it with sources both inside Iran and outside."

"No one is entitled to the truth." --E. Howard Hunt