Emma Knightley and Kimberley Wildman thought the group would be the ideal way for them and their children to make friends.
They were encouraged to come by a mixed-race friend who attends meetings despite being born and raised in Britain.
But when they arrived for their first session, a female volunteer told them they weren’t welcome because they were British-born.
The Making Links group in St Neots, Cambridgeshire, was set up to help integrate foreigners and their children aged under five into the community.
It receives money from the town council and the Department for Communities and Local Government.
But legal experts warned the group could be in breach of the Race Relations Act, and faces action in a civil court which could order it to pay compensation.
WHAT THE LAW SAYS ON RACE
Nationality and race are protected under last year’s Equality Act. This states that people have a right not to be discriminated against, harassed or victimised because of these factors.
But the Race Relations Act 1976 gives permission for a form of positive discrimination, for example in providing funding for gay or lesbian groups, or advertising for a female social worker to help women who have been victims of domestic violence.
Caroline Herbert, an expert in discrimation law, said the two women could claim discrimination.
She added: ‘A case could be brought in a civil court, which could award compensation.’
Shop worker Miss Knightley, 25, who lives in the town with her 21-month-old daughter Imogen, said: ‘The first thing I was asked about was my nationality and when I said I was British I was told we had to leave.
‘She said “Are you not aware this is for foreign people only?” I said I knew it was trying to integrate people into the community but didn’t realise that meant British people and their children were banned.
‘I felt humiliated. You wouldn’t get away with a British-only mum and children’s group.’Trainee midwife Miss Wildman, 27, who has two daughters, Georgia, five, and 18-month-old Olivia, added: ‘It’s a real shame.
‘I want my children to play with children from other races and integrate in the community because that stops discrimination.’
When the pair were challenged last week, Miss Knightley pointed out that their friend, who is of Indian and Malaysian descent, was born and bred in Britain too.
The volunteer replied: ‘But her parents aren’t.’
Ministers said the group was ‘divisive’ and ‘racist’.
Last night the Department of Communities and Local Government announced it would effectively abolish it by cutting its public funding.
Communities and local government minister Bob Neill said: ‘It is a real cause for concern that monies allocated for community development are being spent in such a divisive manner.
‘Rather than building good community relations, such an insensitive approach that seemingly discriminates against British people threatens to undermine community cohesion.’
Justice minister Jonathan Djanogly, whose Huntingdon constituency includes St Neots, added: ‘I’m upset to hear that constituents have had a racist experience.
There is a question here of legality and also of sensitivity. Teaching people how to integrate involves allowing people to integrate.’
St Neots is in the heart of a region that has been a magnet for economic migrants in recent years because of the wealth of jobs available.
These include vegetable picking on farms and food processing or packing work in factories. Making Links is run by a charity called Heart of the Community Trust and used by more than 70 women from 30 countries.
The group is staffed by volunteers and receives £11,000 each year from a variety of sources. St Neots Town Council gives £1,000, while Faiths in Action, which is funded by the Community Development Foundation, a quango answerable to the Department for Communities and Local Government, hands over £5,000.
On application forms it sent applying for funding, it said that its weekly sessions help free women and children from ‘feelings of isolation, help them build multicultural friendships and empower them with knowledge about the local community’.
Making Links administrator Roger Owen said there were ‘plenty of other alternatives for British mothers in the town’.
He added: ‘We get the money on the basis it’s a group for ladies from other nations. We’re not sure they would give us the money if we were offering just the same services for local people.
Emma and Kimberley had taken their daughters along after successfully registering to join the group before Christmas.
But as they began to sit down at the Priory Centre, organisers realised they were British and asked them to leave
‘This isn’t racism. What we are doing is helping people from other countries.’
St Neots mayor Gordon Thorpe said officials had checked Making Links’ constitution before handing over its grant.
A spokesman for the Communities Development Foundation said: ‘It is up to [Making Links] to say who can’t come. It is not in the terms of the grant.’
But a Department for Communities and Local Government spokesman said: ‘We will not be issuing new guidelines but this group is going to be abolished by withdrawing funding in future and its public body status will be removed.’
A source at the department added: ‘We have not been very impressed with what they have been doing. We think it is a misinformed decision they have taken.’
A spokesman for the Equalities and Human Rights Commission said: ‘Whether or not this group is breaking equality law is a matter for the court to decide.
‘However, under the Equality Act 2010 there have to be good reasons why some people are excluded from using a service such as this.