The concert at Garofani school was cancelled following the terror attacks in Paris in November and the teacher feared that the concert could cause offence to non-Christian pupils and families.
The decision of Marco Parma to ban traditional Christmas festivities caused outrage across Italy.
Mr Parma, 63, had decided to instead hold an evening of song in January rather than a Christmas celebration.
The move caused anger amongst parents and politicians according to The Daily Telegraph.
Italy's Prime Minister, Matteo Renzi, said it was political correctness getting in the way of the nation's culture: "Discussion and dialogue does not mean to say we can drown out identity for the sake of a vauge and ispidid form of political correctness," he told Corriere della Sera.
He went on: "Italians, both non-religious and Chrisitans, will never give up Christmas."
Parents from different faith backgrounds were unhappy with the decision to stop the carol service and the education minister was urged to intervene to help change the mind of Mr Parma.
Of 1,000 children at the school around 20% of pupils are born to non-Italian parents and many parents arrived at the school gates demanding to know why it was cancelled.
A petition was also started after parents became aware of the decision to remove crucifixes from school classrooms.
Mr Parma handed in his resignation following the backlash, and he denied that his decision was a step backwards in the fight against religious extremism: "I believe that respecting the sensitivites of people of different religions or cultures is a step forward towards integration.
"This is a multi-ethnic school."
The mayor of Rozano said that she would ask the school to reinstate the concert.
This story came to light days after a number of nurseries in Tuscany decided not to display a nativity scene for fear of offending non-Christian families.
