It comes as broadcasters continue to conduct a reappraisal of old content in light of increased attention on issues of race following Black Lives Matter protests after death of George Floyd in the U.S.
The Germans episode, which was first aired in 1975, is no longer available on BBC-controlled UKTV, while the corporation conducts a review.
In the episode, Basil Fawlty declares “don’t mention the war” around German guests, while the Major Gowen character uses offensive language about the West Indies cricket team.
A statement from UKTV said: “UKTV has temporarily removed an episode of Fawlty Towers ‘The Germans’ from a Gold Box Set.
“The episode contains racial slurs so we are taking the episode down while we review it.
“We regularly review older content to ensure it meets audience expectations and are particularly aware of the impact of outdated language.
“Some shows carry warnings and others are edited. We want to take time to consider our options for this episode.”
John Cleese, who created and starred in Fawlty Towers, said he found the decision to remove the episode to be “stupid” and that the show was intended to provide a critique of racist attitudes.
He told the Age: “One of the things I’ve learned in the last 180 years is that people have very different senses of humor.
“Some of them understand that if you put nonsense words into the mouth of someone you want to make fun of, you’re not broadcasting their views, you’re making fun of them.”
Cleese also criticized BBC management for bowing to pressure to remove “problematic” TV shows following the global Black Lives Matter protests.
“A lot of the people in charge now at the BBC just want to hang onto their jobs,” he said.
It comes as Little Britain, a British sketch comedy show, was also removed from BBC iPlayer, BritBox and Netflix due to its use of blackface.
The show which first aired on the BBC in 2003, saw comedians David Walliams and Matt Lucas wear women’s clothes and facial hair, with Desiree DeVere, a black woman played by Walliams in full blackface.
A spokesperson for the BBC said: “There’s a lot of historical programming available on BBC iPlayer, which we regularly review. Times have changed since Little Britain first aired so it is not currently available on BBC iPlayer.”