An Islamic group had its booking at the Church in Wales-affiliated Feed My Lambs venue in Caernarfon revoked after a "misunderstanding".
Llanbeblig Rector, the Rev Roger Donaldson told the Daily Post: "The understanding was they were going to hold 'bible readings'.
The group had already used the former infant school on two occasions before having a cheque to Llanbeblig Parochial Church Council for £320 returned to them.
Rev Donaldson, who was not party to the initial agreement, added: "We are not against Islam; no way. Everybody has the right to worship as they please.
"We are not against colour or race. It was just not possible. There has been a breakdown in our public relations."
Local Plaid Cymru politician Sian Gwenllian told the Daily Post: "The Muslim population of Caernarfon may be small but its members are very much part of our community and should be able to use this building just like anybody else."
Disappointed by the move, Local councillor Kenny Khan said "These people pay local taxes. The hall has been Lottery-funded and is for the use of the community. They've accepted the cheque and something has happened."
Rev Donaldson also said: "Feed My Lambs is used for Christian worship and is considered to be a place of worship."