'Children as young as four were reportedly left in tears after being told Santa was 'made up' during a Christian assembly.
Pupils were then asked to smash up chocolate versions of St Nicholas and his reindeer to hammer home the point.
Parents said their children had come home feeling devastated following the sermon by a children's worker from a Christian charity.
The head teacher of Fleet Wood Lane School in Spalding, Lincolnshire, insisted that the children were not told 'Santa does not exist', but has since apologised and said the school would no longer be working with the group.
The Mary Bass Charity, which seeks to 'further the religious and other charitable work of the Church Of England' in the Lincolnshire district of South Holland, said it was investigating.
It is understood the woman delivering the assembly on Thursday was trying to explain to children that Jesus was the reason behind Christmas, not Santa, who had been 'made up'.
They were asked to demonstrate they understood that there was more to Christmas than sweets and presents by smashing up the chocolate.
Parents said many took this to mean Santa did not exist. One mother, whose youngest child at the school is four years old, said: 'My children said two children were asked to come to the front of the hall and smash chocolate Santas and reindeer with hammers to symbolise they were not what Christmas was all about.
'They were encouraged to do this by the offer that they could take the chocolate home afterwards, and were also told that if they didn't believe in God and Jesus they would go to hell.'
Read more: Children left in tears after being told 'Father Christmas isn't real' by Christian charity worker who made them smash up chocolate Santas to 'hammer home the point'
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