The school, located in Lüneburg, announced that it would re-locate the event "out of consideration for those of other faiths."
Attendance of the party, which had previously been compulsory for both students and teachers, will now be voluntary.
The decision was made after a Muslim student complained about "the singing of Christian Christmas carols" because they were "not compatible" with her religion.
Many students were furious at the move, with one commenting, "Something is being made a problem where none was before."
However, student spokeswoman Thurka Parathaman said the outcome was correct because students of other faiths had to be taken into consideration.
This serves as yet another reminder of how Europe's Christian heritage is being slowly eroded as the continent undergoes an influx of mainly Muslim migrants.