I've always assumed that it's Jew's Harp because at some time it was either used in Jewish street music, or sold by Jewish street traders - and in both cases no slur would be implied.

The only derivation which would imply a slur would have been if the suggestion was that they were Jewish because they were cheap, and therefore associated with being mean. But if that were the case, why would the term have been restricted to the instruments, rather than transferred to cheap harmonicas, which are also called mouth harps? And I've never heard anyone call a harmonica a Jew's Harp.

So there's no need for anyone to get into a paddy about it...