Baroness Rendell of Babergh, better known as crime writer Ruth Rendell, attacked views that black or Asian actors should not be cast in roles traditionally played by white actors.
She believes some sections of the theatre and the media still hold the notion that employing ethnic minorities on and off-stage failed to attract audiences.
The Lords debate follows a survey which concluded the theatre was institutionally racist, with 88% of theatre staff claiming they had been subjected to racism in their job.
Lady Rendell said: "The old objection to casting Afro-Caribbeans in roles originally intended for white actors is still being put forward, in spite of this prejudice having been shown in the majority of cases to be unfounded.
Saddened
"At the other end of the spectrum are theatres which are making real advances."
Labour peer Baroness McIntosh of Hudnall, who is principal of the Guildhall School of Music and Drama, said she was saddened the media still commented on a black actor playing an English King in a Shakespeare play.
The former Royal National Theatre executive director said the fact that an actor may be among the finest of his generation was ignored simply because he is black "and, as we all know, medieval English kings were not".
"It's time we grew up," she added.
Crossbencher Lord Chan was also concerned about the lack of non-Europeans actors in the theatre, even in multi-cultural performances such as the Mikado and Madam Butterfly.
Ensuring representation
He asked: "Is there a case here of institutional racism, for the theatre to answer?"
Opposition peer Baroness Buscombe said progress would only be made if money was made available for education and training.
"The overall aim must be to ensure representation at all levels and this must mean artists, writers and producers, as well as all levels of management," she said.
"At the same time, we must be realistic.
"It is not just a question of meeting targets. It is probably unrealistic to expect as broad a diversity of communities working in theatre in rural Dorset, as say in Stratford, East London."
Culture and media minister Baroness Blackstone said she did not believe there was deliberate racism in the theatre but it was sometimes done "unthinkingly".
"Black, Asian and Chinese artists still, I agree with some justice, may not feel they get enough exposure on the stage and black audiences may not feel welcome in some institutions.
"We must encourage a change of attitude so that talent will out," she said.