Ofcom has backed a BBC Trust decision not to censure the BBC over using the word "pikey" in an edition of Top Gear.
The Traveller Movement complained after former host Jeremy Clarkson was seen holding a placard with "Pikey's Peak" while shooting in Worcestershire.
In March, the BBC Trust said it had been used to mean "cheap", rather than as a term of racial offence.
Ofcom said there was "sufficient context in the way the word was used to minimise offence".
The broadcasting regulator said it recognised that "some in the audience would perceive the word pikey as a derogatory term for gypsies and travellers".
It added: "We have advised broadcasters this doesn't mean the use of the word is acceptable in any programme in any context and that it is capable of causing significant offence in certain contexts."
The BBC also admitted the word could be "a derogatory term" but cited online encyclopaedia Wikipedia as proof it also referred to someone who "lives on the cheap".
In its complaint to Ofcom, the Traveller Movement said: "Had a more neutral word like "cheapskate" been used, it would not have had such a 'transgressive punch' ie provocative impact".
However, the BBC had argued "the issue in determining whether it is offensive in any particular case is the intention behind its use, and the context in which it is used".
In the scene, Clarkson held up the sign as co-presenter Richard Hammond prepared to test the performance of a used hatchback car by racing up Shelsley Walsh Hill Climb in Worcestershire, the site of a particularly steep racing climb.
Presenter Jeremy Clarkson mocked Richard Hammond for choosing a Vauxhall Nova, and erected a placard at the start line that read "Pikey's Peak", a play on words in reference to Pikes Peak, a famous hill climb in Colorado.
In its considerations, Ofcom had noted Top Gear was "widely known for its irreverent style and sometimes outspoken humour" and added the reference to the use of the term "pikey" was part of a "long running gag" on Top Gear and that "Richard Hammond had been linked to it on previous occasions".
It concluded that "it is likely that the audience would not generally have considered that there was a direct and pejorative association between the reference to the word 'pikey' in the sign 'Pikey's Peak' and a discriminatory usage referring to Gypsies and Travellers in a way which would cause widespread offence."
Reacting to the ruling, the Traveller Movement told the Press Association: "We are appalled that Ofcom have followed the BBC Trust's line and have green-lit the use of 'pikey' on Top Gear.
"Their decision that this particular use has no reference to Gypsies and Travellers is bankrupt."
A spokesman said they would meet with lawyers to "consider our options".
An Ofcom spokesman rejected any inference that the decision had been based on the BBC Trust's findings.
He said: "As the UK's broadcast regulator, our team investigated this programme completely afresh and reached an independent decision."