The display opens in two weeks (mock-up image)
The Christmas display at the Edinburgh Dungeon opens to the public on 15 December and features "elves impaled on spikes and robins roasting on an open fire while Santa gently boils in a witch's cauldron".
But the site, which shows Satan sitting on a throne surrounded by books on Devil worship, has been branded "blasphemous" and "dangerous".
A leading psychologist also said "there are dangers" in allowing children as young as eight to see the display.
Merlin Entertainments said actors playing Satan would ask children who enter the grotto if they have been bad and offer "nasty presents" instead of sweets.
A coffin pulled by skeletons will be erected in place of Santa's usual sleigh and reindeers.
The display will add to other attractions at the Edinburgh Dungeon near Waverley Bridge, which features the lives of Scotland's most macabre crimes and criminals, including the Galloway cannibal Sawney Bean and bodysnatchers Burke and Hare.
But Edinburgh Dungeon manager, Scott Williamson, 24, said the event was just harmless fun.
Devil worship
"From a holier-than-thou perspective, I can see why the churches are upset," he said.
"We have turned the nice idea of Santa's Grotto into something bad but we are not out to offend anyone.
"It is aimed at adults and children. We leave it to parents' discretion to allow young children.
This view however was not shared by church groups and a leading psychologist.
Colin Hart, director of the Christian Institute, called for Edinburgh City Council to ban the grotto.
He said: "This is bizarre and blasphemous. Glorifying and promoting the occult as a Christmas attraction is not only very tasteless but sad and very dangerous."
Peter Kearney, spokesman for the Roman Catholic Church, said that Christmas should be about celebrating the birth of Christ.
Glasgow University psychologist Dr Geoff Scobie said the display could be easily played down but there were "dangers" in letting children see it.
"What one really has to be careful of is giving children the impression that being bad or evil gets you gifts," he said.
"It is very dangerous to reward children for being bad. It could encourage them to be violent, aggressive and intimidating to others.
"Operating this grotto runs completely contrary to the virtues that Christmas is about, such as sharing and goodwill. It extols the virtues of being bad."