It's not the first time that the word in question has caused a song to be censored or banned. A few years ago, the BBC's flagship radio station (the imaginatively-named Radio 1) censored the same word in the Pogues' Fairytale of New York:
Indeed. I really tire of the overuse of the term "racism".
Racism is "the prejudice that members of one race are intrinsically superior to members of other races".
It can also be "abusive behavior towards members of another race" presumably justified by the former prejudice.
The British are not one race. I am British as are my Black, Asian and Oriental friends and colleagues. We are from different races; we are all British.
I am not being a pedant.
Racism has been an excuse throughout history to subjugate, kill, enslave, torture and experiment on innocent people. It is a real issue for many people in this world today, mostly the non-Caucasians.
Racism is a BIG deal. It is about Liberty. It is about what makes us human.
Banning a pop-song because it is played by black artists is almost certainly racism. Banning a song for the use of the word "faggot" is not - even if all of the artists on the song are black. And, yes, racism towards Caucasians does exist but it is mostly a small problem for people living in East Asia. Positive discrimination, though often accused as such, is not racism. (although it is, clearly, discrimination)
I disagree with the banning this song but not because it is a "British Classic" (in my opinion it is not - it's just a fun pop-song) but because the word faggot is used in context - in the character of a bigot complaining about his life in comparison to that of a Pop star. In the video Dire Straits show themselves to be the faggots.
Also, I'm fairly sure that the characters being portrayed are supposed to be Blue-collar Americans (faggot is not a commonly-used British phrase - "Poof" would have been the 1980s British equivalent).
So, if anything, there's an argument for it being Blue-Collar-Americanist.
As a caucasian central european I find it racist that some Brit deems himself another race than me and majority of Canucks, apologies to all Brits of Asian, Semitic, African, etc... descent.
Disclaimer: I deem majority of Canucks of Caucasian race - I might be misguided and therefore unintentionally racist.
And there's a version that replaces the middle, offending verse with instrumental. In Australia growing up at least that was the version that got the most airplay - I had street cred because I knew the words to the second verse of MfN (and the Flintstones - but that's another story), though if you sang it in front of people who didn't realise those were actual lyrics you might have some explaining to do.
http://news.bbc.co.uk/2/hi/7149525.stm