The BBC was forced into an embarrassing reversal after overturning a decision to censor the word “faggot” from the popular Christmas song A Fairytale of New York.

Fans complained after Radio 1 “bleeped” the word from the song recorded in 1987 by the Pogues and Kirsty MacColl. The station said that it could be offensive to homosexuals.

The story of two lovers who trade insults on Christmas Eve, includes the line: “You scumbag, you maggot, you cheap lousy faggot, Happy Christmas your arse, I pray God it’s our last.”

Radio 1 had played the song in full for 20 years but the Head of Music decided to censor the track after it soared up the Christmas chart once again, citing changing tastes. Radio 1 also decided to bleep out “slut” from the lyrics but kept in “arse”.

However the BBC’s position became untenable after it emerged that Radio 2 was happy to play the song in full for its listeners. Chris Moyles, Radio 1’s star DJ, attacked the decision and the mother of the late Kirsty MacColl called the “bleeping” pathetic.

BBC websites were flooded with complaints over the decision. A page on the social networking website Facebook urged fans to download the song, already in the top ten, to help drive it to the Christmas No 1 slot on Sunday.

Don Foster, the Liberal Democrat culture spokesman, accused the BBC of using “political correctness” to “stifle creativity and artistic freedom”.

Andy Parfitt, the Controller of Radio 1, announced a U-turn last night, after deciding that the Pogues had not used the word with “negative intent”.

He said: “After careful consideration, I have decided that the decision to edit A Fairytale of New York was wrong. Radio 1 does not play homophobic lyrics or condone bullying of any kind. It is not always easy to get this right, mindful of our responsibility to our young audience.

“While we would never condone prejudice of any kind, we know our audiences are smart enough to distinguish between maliciousness and creative freedom.

“In the context of this song, I do not feel that there is any negative intent behind the use of the words, hence the reversal of the decision. The unedited version will be played from now on.”

It is not the first occasion Radio 1 has run into controversy over the use of potentially homophobic language. Moyles sparked a complaint when he dismissed a ringtone as “gay”. But the BBC Board of Governors ruled that the word now means “lame” or “rubbish” to young people.

Shane MacGowan, who wrote the song and sings it with MacColl, told Channel 4 News that the censorship said “more about Radio 1 than anyone else”. MacGowan added: “It is just a pop song at the end of the day.”

However Peter Tatchell, the gay rights campaigner, said the “bleeping” was correct. He said: “I challenge anyone who defends the use of the word ‘faggot’ to state that they would also defend the right to use the word ‘nigger’ as a term of abuse in a song. They won’t and that makes them cowardly, homophobic hypocrites.” Jean MacColl, the singer’s mother, compared the song with a play. “These are a couple of characters, Irish immigrants not in the first flush of youth and this is the way they spoke,” she told BBC Radio 5 Live.

“Shane [MacGowan] wrote the most beautiful song and you really feel for these characters. Shakespeare was quite open about certain expressions. You cannot emasculate the song. It’s absolute nonsense.”

Yesterday marked the seventh anniversary of Kirsty MacColl’s death, after she was hit by a power boat while scuba diving. She was the daughter of the folk singer Ewan MacColl.

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