Grillo, a comedian by trade, made the joke during a live show in Padua on Saturday night, saying, "I can't wait to see when the new Muslim mayor of London blows himself up at Westminster".
The borderline quip was immediately slammed by his opponents as xenophobic, with the Democratic Party candidate for Rome, Roberto Giachetti, tweeting that he "hadn't found it funny".
Opponents also accused the comedian of deliberately making the comments in a bid to deflect attention from the high-profile corruption scandals gripping his Five Star Movement.
Since bursting onto the political scene in 2009 the populist, anti-establishment M5S has been elected to local councils on anti-corruption tickets across the country. Polls suggest the party is now the second most popular after the ruling Democratic Party.
However, two M5S mayors – Federico Pizzarotti in Parma and Fillipo Nogarin in Livorno – have recently come under investigation for alleged corruption. Both mayors protest their innocence, but the situation is a stain on the party, which prides itself as offering a 'cleaner' brand of Italian politics.
Forza Italia's Lara Comi accused Grillo of "trying to recover from the highly embarrassing situation with [Parma Mayor] Pizzarrotti with a sad joke about London's new mayor".
The ill-timed joke comes one month before Rome elects its new mayor, with M5S's candidate, 41-year-old mum Virginia Raggi, currently the front-runner.
Raggi has not commented on the issue.
"Silence from Virginia Raggi," tweeted Democratic Party MP Alessia Morani, "Beppe Grillo's squalid and racist joke is sad and embarrassing."