The Diocese of Southwark responded after All Saints Church in Kingston-upon-Thames was accused of "glorifying" the prophet.
An Islamic prayer was recited and a birthday cake was cut during the "Milad, Advent and Christmas Celebration" at the church last Sunday.
Christian blog website, Archbishop Cranmer claimed the church was "rejoicing in both [Jesus and Mohammed], eulogising both, solemnising both, glorifying both, honouring both".
Lasting for one hour and organised with local interfaith groups, it had been billed as an event "marking the birthday of Prophet Mohammed and looking forward to the birthday of Jesus".
Archbishop Cranmer said: "Every time a church accords Mohammed the epithet 'Prophet', they are rejecting the crucifixion, denying the resurrection of Christ, and refuting that the Word was made flesh and dwelt among us, for Mohammed denied all of these foundational tenets of the Christian faith."
A spokesperson for the Diocese of Southwark said the event "enabled Christians, Muslims and others to meet together in order to promote better understanding, conversation, and relationships.
"It was not a service and the event broke no Canon law."
Observed in the third month of the Islamic calendar, Milad (or Mawlid) is the name of the festival to mark Mohammed's birthday.