The scene reportedly unfolded at Cinema Nova in Carlton on Saturday night as moviegoers watched Zone of Interest, which is set at Auschwitz concentration camp.
A Victoria Police spokeswoman said it "understands incidents of anti-Semitism can leave communities feeling targeted, threatened, and vulnerable" and should not be tolerated.
"It is believed a group of patrons performed a Nazi salute and called out a racial slur at a cinema on Lygon Street about 9.15pm," she said.
"The exact circumstances surrounding the incident are yet to be determined and the investigation is ongoing."
Cinema Nova said the group was made up of four men and one woman who "were vocalising hate speech to create a scene".
"The group admitted to creating a scene when confronted by management at the conclusion of the session," a spokeswoman said.
Security escorted the group out of the venue before staff reported the incident to police.
Performing a Nazi salute has been illegal in Victoria since 2023.
The Jewish Council of Australia's executive Max Kaiser took aim at the alleged actions and said "neo-nazis breed in a soup of racism".
"The perpetrators of this disgraceful incident have showcased nothing but their own moral bankruptcy," he said.
"These people are nothing more than contemptible, pathetic individuals seeking attention through offensive behaviour."
Anyone found guilty of performing a Nazi salute in Victoria could face fines of more than $23,000 or 12 months in prison.
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