Residents were shocked after a caravan with effigies of Gypsies was burnt at a village bonfire party.
The Firle bonfire party has been criticised
The caravan was wheeled through a street in Firle, East Sussex, before being torched.
Now the Commission for Racial Equality has called for those responsible to be prosecuted for incitement to racial hatred - which can lead to a jail term of up to seven years.
One resident has said she was sickened by the show on Saturday and that many others were shocked by what they saw.
Patricia Knight, who was at the bonfire with her seven-year-old daughter, said: "A caravan was wheeled down the street which portrayed women and children inside, with 'pikey' written on the back and the image of a scantily-clad woman standing in the door.
"I could see other people looking shocked and I could hear shouts of 'racists' directed at the bonfire society and 'shame'."
Villagers chose the effigies after gypsies were evicted from the area
Part of the celebration at Firle is said to be that no-one knows in advance what the effigy is going to be.
Villagers, who have asked not to be named, have said the effigy was chosen after the recent eviction of travellers from a nearby field.
After the event, images of the event were posted on the internet.
But Richard Gravett, chairman of Firle Bonfire Society, said: "There was no racist slant towards anyone from the Travelling community. If anything, it's actually completely the other way.
"It is to try to make people sit up and listen and realise that these people obviously - as all of us do - need somewhere to live."
Trevor Phillips, chairman of the Commission for Racial Equality (CRE), said the organisers of the bonfire should be prosecuted.
He said: "Gypsies and Travellers probably suffer the most discrimination in this country.
"This is clearly an example of incitement to racial hatred. You couldn't really get more provocative than this.
"The police have to take it seriously. If we are asked at the CRE, we will say this case should be pursued and the people involved should be punished - which can lead to seven years in prison.
"The idea that you can carry out an act like this and then apologise and get away with it, is exactly what produces a culture that says racism and discrimination and victimisation of people, because of what they are, is OK."