Olympic organisers said on Thursday that Taiwan's flag had been taken down from a London display at the request of the Chinese embassy.
The banner was removed from a row of national flags hanging over Regent Street, one of London's busiest shopping roads, and replaced on Wednesday with that of Taiwan's Olympic committee.
This flag has been used by Taiwan at Olympic Games since the 1980s, when the International Olympic Committee (IOC) ruled that the island could not compete under its formal name, the Republic of China.
Games organisers LOCOG said they had advised the Regent Street Association, which represents retailers and is in charge of the display, to remove the Taiwan flag after a complaint from China's embassy.
"The Chinese Embassy informed us that the incorrect flag was on display, and we passed this information on to the Regent Street Association," a LOCOG spokesman told AFP.
The Chinese embassy in London did not respond to repeated requests to comment.
China and Taiwan have been ruled separately since the end of a civil war in 1949, but Beijing still claims sovereignty over the island and has vowed to bring about reunification even if it means war.
Taiwan's representative in Britain, Shen Lyushun, insists that the IOC ruling on its flag only applies to Olympic venues and has demanded an explanation.
A spokesman for Shen said: "This agreement doesn't prevent us from using our national flag outside Games venues -- and this flag is in a business area, not a venue.
"We do hope our national flag will be put back in its original place."
The row comes after a mix-up over North Korea's national flag prompted its women's football team to walk off the pitch on Wednesday in an embarrassing start to the Olympics.
London organisers apologised after the North Korean squad were pictured next to the flag of South Korea -- with whom the North is officially still at war -- at their opening match against Colombia at Hampden Park in Glasgow.
The North Koreans left the pitch in protest but were persuaded to return an hour later after the mistake was rectified, and went on to win the match 2-0.