Mercury, who died of AIDS in 1991, violated Islam with his flamboyant lifestyle, said Azan Khalid of Zanzibar's Association for Islamic Mobilization and Propagation.
"That's why he was branded a Queen," Khalid said, adding that anything linking Mercury with Zanzibar's Muslim population would be offensive.
He said that a waterfront restaurant's plans for a Sept. 2 party honoring Mercury's birthday would be stopped.
Mercury restaurant, which was named for the singer, will go ahead the party, manager Simai Mohammed said.
Mercury, who acknowledged being gay, was born in Zanzibar when the country was still a British protectorate. He was educated in India and moved with his family to Britain in 1964, after a bloody revolution that drove out many immigrants of Indian or Arab descent.
"Our main idea is to promote tourism and Freddie Mercury was from Zanzibar. It's part of our history," Mohammed said. "We are all Muslims and it's not our intention to offend any religion."
Last year some 500,000 tourists traveled to Zanzibar, bringing vital foreign currency to the Indian Ocean island. This semiautonomous part of Tanzania is mostly Muslim.
Zanzibar's government sent a letter asking state-owned media not to report on Mercury's birthday because of the tension between the religious group and the restaurant. The group's aim is for Zanzibar to be ruled based on the Muslim holy book, the Quran. Last year, the group broke up a gay man's birthday party in Zanzibar's Pemba island.
Mercury gained fame as the bravura singer for Queen, whose elaborate and occasionally bombastic songs made the group one of the favorites of the 1970s. The group's hits included "Bohemian Rhapsody," "We Are The Champions" and "Crazy Little Thing Called Love."