The girl's family repeatedly begged the east London council to place the girl under the care of family or close relatives instead of her foster family but Tower Hamlets refused.
The children's rights watchdog is investigating the placement, including reports that the girl was left distressed after being housed in two different Muslim homes, The Guardian says.
Her foster carers had allegedly told her to remove her Christian cross and forbid her from eating her favorite meal - spaghetti carbonara - because it contained bacon.
"Every child is entitled to live in the family that bore it but if conditions do not let the parents take care of it, it is the State's duty to entrust it to a family with similar value characteristics, also on a religious level", MOIGE said.
Miqdaad Versi, the assistant secretary general of the Muslim Council of Britain, criticised The Times report, calling it "appalling hypocrisy".
She had reportedly told her mother that Christmas and Easter are "stupid" and European women are alcoholics after being fostered by the Muslim families. The foster placements were made against the wishes of the girl's family, The Times reports.
The girl's mother was said to be horrified by the ordeal, with a friend telling the newspaper: "This is a five-year-old white girl".
Andrew Wood"Foster families have a duty not to impose their own beliefs on a child
The girl lived with her first carer, who is believed to have worn a niqab outside the family home, for four months.
"She's already suffered the huge trauma of being forcibly separated from her family", the family friend continued.
The supervisor even reported the girl was whispering Arabic words to her mother that she told her must be said aloud so that "when you die you go to heaven".
The child welfare reports obtained by the Times reported that the young girl's family is anxious for the child's well-being after hearing concerning allegations from the child.
"I have never found ethnicity, race or religion has been an issue", says the 28-year-old community organiser.
And Philip Hollobone, Tory MP for Kettering, told the Evening Standard: 'The original heritage of the child ought to be respected by the foster family, whatever their own faith happens to be.
The council failed to respond The Times's request for comment on the individual case, but a spokesman insisted they "give absolute consideration to our children's background and their cultural identity".