Staff have been ordered to take down decorations and to remove any other signs of the Christian festival because they could offend Moslems.
The charity's politically-correct move triggered an avalanche of criticism and mockery last night - from Christians and Moslems.
Christine Banks, a volunteer at a Red Cross shop in New Romney, Kent, said: 'We put up a nativity scene in the window and were told to take it out. It seems we can't have anything that means Christmas. We're allowed to have some tinsel but that's it.
'When we send cards they have to say season's greetings or best wishes. They must not be linked directly to Christmas.
'When we asked we were told it is because we must not upset Moslems.'
Mrs Banks added: ' We have been instructed that we can't say anything about Christmas and we certainly can't have a Christmas tree.
' I think the policy is offensive to Moslems as well as to us. No reasonable person can object to Christians celebrating Christmas. But we are not supposed to show any sign of Christianity at all.'
Labour peer Lord Ahmed, one of the country's most prominent Moslem politicians, said: 'It is stupid to think Moslems would be offended.
'The Moslem community has been talking to Christians for the past 1,400 years. The teachings from Islam are that you should respect other faiths.'['lolololol]
Within the boundaries of Islamic law, as far as enforcing it is feasible, and the last word -- the lasting blueprint for Islamic tolerance -- is Qur'an 9:29.
He added: 'In my business all my staff celebrate Christmas and I celebrate with them.
It is absolutely not the case that Christmas could damage the Red Cross reputation for neutrality - I think their people have gone a little bit over the top.'
The furore is a fresh blow to the image of what was once one of Britain's most respected charities.
The British Red Cross lost friends this year over its support for the French illegal immigrant camp at Sangatte and its insistence on concentrating large efforts on helping asylum seekers.
officials at the charity's London HQ confirmed that Christmas is barred from the 430 shops which contributed more than £20million to its income last year.
'The Red Cross is a neutral organisation and we don't want to be aligned with any political party or particular philosophy,' a spokesman said.
'We don't want to be seen as a Christian or Islamic or Jewish organisation because that might compromise our ability to work in conflict situations around the world.'
He added: 'In shops people can put up decorations like tinsel or snow which are seasonal. But the guidance is that things representative of Christmas cannot be shown.'
Volunteers, however, said they believed the Christmas ban was a product of political correctness of the kind that led Birmingham's leaders to order their city to celebrate 'Winterval'.
Rod Thomas, a Plymouth vicar and spokesman for the Reform evangelical grouping in the Church of England, said: 'People who hold seriously to their faith are respected by people of other faiths. They should start calling themselves the Red Splodge. All their efforts will only succeed in alienating most people.'
Major Charles Heyman, editor of Jane's World Armies, said: 'There is really nothing to hurt the Red Cross in Christmas, is there?
Would the Red Crescent stop its staff observing Ramadan?
The charity's umbrella body, the Swiss-based International Red Cross, has also had politically-correct doubts about its famous symbol. But efforts to find an alternative were abandoned in the face of protest and ridicule five years ago.