Israel's National Library is calling on a German museum to hand over the original manuscript of Franz Kafka's novel The Trial to correct a "historical error", in the latest unravelling of a complex dispute over the writer's legacy.

The manuscript was sold at auction by Sotheby's in 1988 for almost $2m to a book dealer acting on behalf of the German government and is stored in the Museum of Modern Literature in Marbach. Now the National Library of Israel in Jerusalem, which collects all works published in Israel, says that The Trial should be returned to the country in accordance with the final wishes of Max Brod, a friend of Kafka and the executor of his will.

It is a new twist in an intriguing dispute over the writer's legacy that began a year ago when it was revealed that two reclusive sisters living in Tel Aviv stand to inherit reams of documents and books from a Kafka archive passed down over decades. The National Library has been in court for months trying to claim ownership.

Kafka died from tuberculosis in 1924, leaving a surprising set of instructions to Brod: "Dearest Max, My last request: Everything I leave behind me [is] to be burned unread." But Brod instead published for the first time Kafka's novels The Trial, The Castle and Amerika.

In 1939 Brod fled his home in Prague as the Nazis approached and took a single suitcase of Kafka papers to Tel Aviv, where he started a new life. He later donated manuscripts of The Castle and Amerika to Oxford University, but kept the original of The Trial for himself.

After the death of his wife, Brod began a relationship with his assistant, Esther Hoffe. When he died in 1968, he left a will that is now hotly disputed.

National Library officials say the will stated that the Kafka documents should pass to them. However, lawyers for the Hoffe family say they were given as a present by Brod to Esther Hoffe and were hers to do with as she wished. She sold documents over several years and when she died two years ago she left the remaining papers to her septuagenarian daughters, Eva and Ruti.

"The National Library of Israel, which is a library of the Jewish people too, understands that in the will of Dr Max Brod he asks that these documents should be placed in a public archive and he names the National Library as the first option for that," said Meir Heller, the library's lawyer.

Heller said that the library was ready to compensate the German archive "as part of this correction of a historical error", using money held in the Hoffe estate that has been frozen until the dispute is resolved.

However, Yeshayahu Etgar, lawyer for the Hoffe sisters, said the documents were a "private inheritance" and this was approved in a 1974 court ruling ratifying Brod's will. Esther Hoffe was entitled to sell The Trial at auction and it was wrong for the library to try to bring it back.

"To bring it back to whom? You should only bring back something to someone who has a legal right to it," he said. "The National Library has not a hint of a right." The sisters were in poor financial health and desperately wanted at least part of the frozen funds released. "All this is stupid and Kafkaesque, and the sisters are very upset about it," said Etgar.

Ulrich Raulff, director of the German literature archive, insisted the manuscript "was acquired by us in 1988 completely legally, under the gaze of an international public". He added: "As far as I'm aware, [the inheritance] was reviewed and deemed legitimate by an Israeli court in the 1970s. In which case, the fact that the papers were delivered to Sotheby's cannot be considered illegal."

Additional reporting by Kate Connolly in Berlin