At Saturday's ceremony, several winners were accused of making anti-Semitic remarks on stage in relation to Israel's military assault, which began after an attack by Palestinian militant group Hamas.
US filmmaker Ben Russell, wearing a Palestinian scarf, accused Israel of committing "genocide" with its bombardment of the densely populated Gaza Strip.
Palestinian filmmaker Basel Adra said the Palestinian population were being "massacred" by Israel, to applause from the audience.
"It is unacceptable that... the terrorist attack by Hamas on 7 October was not mentioned," government spokeswoman Christiane Hoffmann told a press briefing in Berlin on Monday.
Chancellor Olaf Scholz "agrees that such a one-sided stance cannot be allowed to stand", she said.
"In any debate on this topic, it is of course important to keep in mind the event that triggered this renewed escalation of the Middle East conflict -- namely the Hamas attack on 7 October," she said.
The culture minister and the Berlin mayor will review what happened and hold talks with the festival's incoming director to ensure it does not happen in future, she said.
Culture Minister Claudia Roth and mayor Kai Wegner have also found themselves in hot water over the ceremony.
A report in top tabloid Bild carried a picture it said showed the pair applauding Adra's remarks.
On Sunday after the ceremony, Wegner posted on social media that the anti-Israel remarks were "unacceptable", adding that "there is no place for anti-Semitism in Berlin".
'Understand the outrage'
Germany -- influenced by its own dark World War II history, when millions of Jews were killed by the Nazis -- has steadfastly backed Israel following the October 7 attack.
The Hamas attack killed 1,160 people in Israel, mostly civilians, according to an AFP tally of official Israeli figures.
Israel's retaliatory military offensive has killed at least 29,782 people in Gaza, mostly women and children, according to the Hamas-run health ministry.
The festival, known as the Berlinale, receives substantial government funding.
Asked whether the funding would now be reviewed, Hoffmann said the focus was on ensuring such incidents were not repeated.
After controversy erupted, the film festival issued a statement Sunday saying that winners' remarks were "independent, individual opinions (which) in no way reflect the position of the festival".
But, it added, "We understand the outrage, and that the statements of some of the award winners were perceived as too one-sided."
Amidst the widespread anger at the comments, Israel's ambassador to Germany, Ron Prosor, posting on social media: "Once again, the German cultural scene showcases its bias by rolling out the red carpet exclusively for artists who promote the delegitimisation of Israel."
At the film festival, "anti-Semitic and anti-Israel discourse was met with applause," he added.
Felix Klein, the government's commissioner for the fight against anti-Semitism, told Funke media group the "one-side, anti-Israel statements" show "how widespread anti-Semitism is not only in the arts and culture scenes, but also in the film industry".
