St Matthew and St Luke's had initially invited members of the Muslim community for an event next month to mark Ramadan.
It also offered different rooms to allow segregated worship for men and women.
Upon hearing about the event the Diocese of Durham intervened and told the church it must not hold Islamic prayers in the church building.
Rt Rev Dr Gavin Ashenden, a former chaplain to the Queen, is one of many to speak out.
Speaking to Premier, the Anglican Bishop of the Christian Episcopal Church in the UK said: "Clearly the motivation behind the event is very good. Anything that tries to get people together to understand each other and be good neighbors, is laudable and to be appreciated but it has to be done from a position of integrity.
Bishop Gavin has welcomed the intervention by the diocese but says he hopes lessons are learnt.
"They realise that the vicar made a silly mistake, but I'm glad it happened because it was raises in the public eye some important issues which people need to work through," he said. "Islam and Christianity are not Abrahamic cousins in Middle Eastern religion. They're actually antithetic to each other."
It's understood the event will go ahead, but prayers will be said elsewhere.
In a statement to Premier, a spokesperson for the Diocese of Durham said: "While it is vital to build good interfaith relations, it is clear that an act of worship from a non-Christian faith tradition is not permitted within a consecrated Church of England building.
"This is a legal position outlined in Canons B1/2/3 and B5 Section 3 where it states: 'all forms of service used under this Canon shall be reverent and seemly and shall be neither contrary to, nor indicative of any departure from, the doctrine of the Church of England in any essential matter'.
"There seems initially to have been some misunderstanding locally of this, but that has been resolved now, with plans for Muslim Prayers to be held in a nearby building then the whole community coming together for a celebratory meal inside the church."
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