A John Constable painting is at the centre of a legal dispute between a Swiss museum and a Jewish family after being identified as looted art during the Second World War.

The Musée des Beaux-Arts in La Chaux-de-Fonds admits the Constable painting, entitled Dedham from Langham and valued at £700,000, was seized illegally during the conflict but is refusing to return the oil painting to the a Jewish family with ties to Britain.

The work is part of a series of paintings of the Stour Valley by the artist, who grew up in East Bergholt on the Suffolk/Essex border, which are considered to be of museum quality. A less detailed Constable landscape with the same title hangs in Tate Britain.

The museum has volunteered to place a plaque next to the painting that would acknowledge that it was “auctioned without entitlement” but will not restore it to the heirs of the Jaffe family, from whom it was stolen. The family plans to sue.

John Jaffe, whose brother was twice elected lord mayor of Belfast at the turn of the century, moved with his wife, Anna, to the South of France and amassed a large private art collection.

Anna was widowed in 1934 and died in 1942, two years after the German invasion of France and shortly before the pro-Nazi Vichy government began deporting Jews to concentration camps.

Art Recovery Group, an organisation that specialises in restoring stolen paintings to their rightful owners, said that Anna bequeathed her art collection to her niece and nephews but the work was instead auctioned at a forced sale in Nice in 1943.

The museum acknowledged that the work was sold illegally but said that it was not required by Swiss law to return the painting. It said that it received the work from previous owners who had acquired it in good faith and that it had a duty to keep the painting on public display.

Chris Marinello, chief executive of the Art Recovery Group, said: “Nazi-looted works of art is a problem that’s persisted for 70 years and isn’t going anywhere.

“Governments should not be permitted to hide behind bureaucracy or continue to force loss victims to engage in costly and emotionally-painful litigation.

“Governments must embrace a transparent and open dialogue in efforts to reach a just and fair solution around matters of Nazi looting.”