The watchdog body said the advert could lead people to believe that eating meat brought on swine flu and other illnesses.
The People for Ethical Treatment of Animals (Peta) advert, posted on a billboard in Glasgow in June, featured the recurring words "E.coli, mad cow, swine flu, MRSA" underneath the statement "Meat Kills".
The words "swine flu" were more prominent than the other text and a statement at the bottom of the poster read: "Go Vegetarian PETA."
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The Advertising Standards Authority (ASA) investigated the poster after a member of the public complained it misleadingly implied swine flu could be caught by eating meat and that it might cause undue fear about how the illness could be contracted.
The watchdog upheld the complaint and said the advert should not appear again in that form.
It found the poster was misleading and could cause undue fear and distress to some people.
Peta said it was not their intention to suggest eating meat caused swine flu and argued consumers would know this was not the case because of the extensive Government health education programme and media coverage of how the illness was spread.
But the ASA said this "did not absolve Peta of their responsibility to ensure their ads did not mislead, or be likely to mislead".
It said Peta's intended message about the role livestock production played in the incubation, development and spreading of fatal infectious diseases was "at best, ambiguous".
The watchdog said: "We considered that some readers might infer from the poster, and in particular the claim 'Meat Kills' in conjunction with the claim 'Go Vegetarian', that eating meat caused swine flu.
"We concluded that the poster was likely to mislead and could cause undue fear and distress to some readers.
"The poster must not appear again in its current form."
Peta said it believed the poster made the legitimate case that a reduction in meat consumption, or adopting a purely vegetarian diet, was one of the best ways to prevent the development and spread of deadly diseases that originated from livestock production and meat consumption and threatened public health.
The charity fought back against the ban today by releasing a new advert which it said made the same point as the original.
The new poster reads "Your Demand for Meat Creates Disease. Stop Factory Farms. Go Veg" and shows a conveyor belt of diseases, including "swine flu", "mad cow disease", "MRSA" and "E.coli", travelling from a factory farm into a person's open mouth.
Poorva Joshipura, of Peta, said: "Peta is sending a clear message that meat eating fuels the demand for filthy factory farms which, in turn, enables pathogens such as the swine flu virus to multiply, spread and cause infection.
"The easiest way for consumers to help prevent the development of animal-borne disease epidemics and infectious illnesses is to go vegan."