“We must exercise harsh mercy with fear and trembling, in the hope that we could save some from the flames and embers. We must not avenge ourselves. They are under God’s wrath – a thousand times worse than we could wish it upon them.”
Even so, despite his seeming restraint in the words “We must not avenge ourselves” he urges:

Firstly, that their synagogues or schools should be burnt down and what will not burn should be razed and covered with earth, that no man will ever see a stone or cinder of it again… Next, that their houses should be broken and destroyed in the same way. For they do the same things there as in their schools. For that they can be put under a roof or stable, like the gypsies… Thirdly, that all their prayer books and Talmudists, in which such idolatrous lies, curses, and blasphemies are taught, should be taken from them. Fourthly, that their rabbis should be forbidden, at the risk of life and limb, to teach from now on. Because they have lost their office for good reason… Fifthly, that escort and road should be completely prohibited to the Jews. For they have no reason to be in the country, being neither landlords, nor officials, nor peddlers or the like… Sixthly, that they should be prohibited from usury and that all their cash and fortunes in silver and gold should be taken from them and put in safekeeping… Seventhly, that young, strong Jewish men and women be given flail, axe, hoe, spade, distaff, spindle, and be left to earn their bread by the sweat of their brows.. For, as all can see, God’s wrath over them is so great that gentle mercy will only make them worse and worse, and harshness little better. So away with them at all costs.

 
Why did Luther express such animosity towards the Jews? First, because Luther stands in a long tradition and history of European anti-Semitism. The Jews must be hated by Christians, so the argument went, because they were “Christ-killers”. Second, for Luther, the Jews were allied with Romanists and Papists, with the peasants of 1525 who had discredited the Reformation by misapplying Luther’s teaching, and with the Muslim Turks. Together they comprised the forces of Antichrist that were a direct and very potent threat to the Gospel. They were a part of a cosmic struggle between the forces of good and evil and, to cut to the chase, they were on the wrong side.
 
Luther’s writings on this subject cast a dark shadow over the Reformation. There can be no defence. His views are thoroughly shameful in every respect. Even so, Oberman points to two ways in which Luther moved beyond medieval anti-Semitism. First, Luther’s students such as Justus Jonas and Andreas Osiander held more nuanced views in hoping for an eschatological coming together of Christians and Jews (Romans 11). Second, even Luther himself in 1544 looked beyond the Jews to the sinfulness of the whole of humanity beginning at home base:

Our great sin and sore misdeed
Jesus the true Son of God, to the Cross has nailed.
Thus you poor Judas, as well as all the Jews
We may not upbraid inimically
For the guilt is ours

 
For more on this see HA Oberman, Luther: Man between God and the Devil (1989) chapter 10 “Wedded Bliss and World Peace”