Communities Secretary Hazel Blears is angry that the Muslim Council of Britain has refused to condemn a senior member who signed a public declaration in support of Hamas.
The document, signed by the council's deputy secretary-general Daud Abdullah, also seemingly advocated attacks on the Navy if it tried to stop arms intended for Hamas being smuggled into Gaza.
Mrs Blears has said that until the MCB - which was once considered the Muslim group closest to Labour - takes a firm stance against Dr Abdullah, relations with the Government will be suspended.
In response, the MCB said it was 'appalled by the highhanded and condescending action' of Mrs Blears.
Yesterday, the council - which has received at least £150,000 in Whitehall grants - released a provocative statement in response to the Government's anti-terror strategy, which threatens a tougher line against groups which promote extremist views.
Dr Muhammad Abdul Bari, secretary-general of the MCB, said: 'The Government's new strategy document rightly insists that the rule of law will be upheld at all times in the fight against terrorism.
'It also says the new strategy 'will tackle the causes as well as symptoms of terrorism'.
'However, earlier this year, for some reason, the Government could not bring itself to describe the barbaric Israeli bombardment of Gaza as actions constituting a war crime.
The Government must be more consistent if we are to successfully counter the terror threat.'
Labour's relationship with the MCB - which acted as a key adviser to Tony Blair in the wake of the July 7 attacks - has lurched between being very close and frosty in recent years. In 2006, ministers decided to distance themselves from the group in frustration at the MCB's refusal to attend Holocaust Memorial Day.
But after agreeing to drop their opposition, it was welcomed back into the fold a year later. This January, however, tensions again exploded when the MCB launched another boycott against the memorial day in protest at the Israeli action in Gaza.
These were heightened further when Dr Abdullah, who has also served as a member of the Government-backed Mosques and Imams National Advisory Board, was one of 90 Muslim leaders around the globe who signed the controversial 'Istanbul declaration'.
It said: 'The obligation of the Islamic Nation [is] to regard the sending of foreign warships into Muslim waters, claiming to control the borders and prevent the smuggling of arms to Gaza, as a declaration of war, a new occupation, sinful aggression. This must be rejected and fought by all means and ways.'
The declaration was interpreted as calling for violence against Israel and condoning attacks on British troops. In response, Mrs Blears wrote to the MCB saying Dr Abdullah should 'resign his post'.
But although the group stressed it in 'no way supports the targeting or killing of British soldiers anywhere in the world', it refused to distance itself from Dr Abdullah.
Dr Abdullah has also told the Guardian newspaper he would not be standing down.
Last night, a spokesman for the Communities and Local Government department said: 'The position of the Deputy Secretary General in relation to the Istanbul declaration remains unclear.
It is essential this is resolved unequivocally given the serious content of the statement regarding violence against British troops.
Dr Abdullah has also told the Guardian newspaper he would not be standing down.
Last night, a spokesman for the Communities and Local Government department said: 'The position of the Deputy Secretary General in relation to the Istanbul declaration remains unclear.
It is essential this is resolved unequivocally given the serious content of the statement regarding violence against British troops.
'We will continue to seek this clarification from the MCB.'
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