TV’s Frink said:
There’s no Israel on Tatooine but Watto is still a racial stereotype.

Oh God… where do I begin ? Let’s give it a try :

there is no jewish race (nazis believed that, sionists still believe that, but this is bullshit), so Watto can’t be a jewish racial stereotype ;
Israel is a country with jewish people, muslims people, North African immigrants of jewish religion and of semitic ancestry, and European immigrants of jewish religion but not of semitic ancestry; so I don’t quite see the point of talking about Israel here since this is not a “full” jewish country nor a “full” semitic country, and which does not represent any race or stereotype that could be found in TPM ;
so Watto is, AT MOST, a semitic racial stereotype. Watto is a slaver and a bad guy, and he looks like a bad guy you could find in North Africa/Middle East (or in the Steptoe/Sanford reference provided by yotsuya). It’s not subtle (Jabba is a bad guy who looks like a bad guy) but I fail to see why this would be racist/antisemite.

Also, read this:

yotsuya said:
And Watto… seriously? Jewish? Why, because of the hat in Episode II… the Don Quixote metal hat? No, he is Steptoe/Sanford - a stereotypical junk dealer, not a Jewish knockoff. Just look at the pics of Steptoe - the long nose, the frequent unshaven appearance, the bad teeth, the narrow face. Watto doesn’t have a beard, he has stubble. There is a big difference. No, you reading more into this than there is. And there are plenty of people in this world who love money who aren’t Jewish, so claiming that has anything connection is really ridiculous, especially since it is just one of the many parallels Watto has with Steptoe and Sanford.