The ad by Bartle Bogle Hegarty starts with a woman giving birth to a baby boy and follows a surreal sequence in which he shoots out of a window, ages rapidly and travels at speed through the air before violently crashing into his own grave as an old man.
The ITC said it did not agree with the advertiser's claim that it conveyed a "positive statement about life."
The ad was deemed particularly offensive to recently bereaved viewers.
"We set out to create powerful, impactful advertising and this decision is not going to affect that strategy at all," insisted Xbox European marketing director Neil Thompson.
He said 'Champagne,' as the ad is called, would continue to be shown in cinemas and on the internet. He added that Microsoft is committed to continuing with BBH as its ad agency across Europe.
Microsoft turned up the heat against Sony PlayStation 2 and Nintendo GameCube last month by committing an extra $2bn (£1.37m) to Xbox. The software giant slashed £100 off Xbox's UK retail price last month following disappointing sales since its March 14 launch in Europe.
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