The brass plaque, which originates from the city's Cable Street Mills factory, was available for £400 on ebay but it has now been taken down after complaints.
Inscribed on the plaque are the words "To the glory of God and in memory of the following who gave their lives in defence of country 1914-18". It went on sale on Friday, with the seller describing it as "reclaimed from a club in Wolverhampton and would suit a collector or enthusiast".
When the mills closed in 1996 the plaque was given to the Wolverhampton branch of the Royal British Legion – and bosses then handed it to the United Services Club in Humber Road, Merridale. The club was later sold, and planning permission was granted to turn it into a mosque.
A spokesman for applicants Tayyaba Masjid, also known as Lime Street Mosque, today said it was being kept in storage and that he had no idea who had put it up for sale. The man, who didn't want to be named, added: "When we took over the club, we spoke to the council about the plaque as we knew it was something sentimental.
"I have spoken to my colleagues, and as far as we are concerned, it is being kept in a storage cupboard in Humber Road. I cannot understand how it would have ended up on ebay, as we would not have put it there."
John Mellor, president of the Wolverhampton branch of the Royal British Legion, said: "Selling something like this is an affront to the dead."
The sale sparked concern with the War Memorial Trust, a charity that works to protect such memorials across the UK, with officials contacting ebay to demand the auction was ended.
Trust director Francis Moreton said: "We do not support the sale of memorials at all.
"We believe that a memorial has no monetary value and they are there as a reminder of those who sacrificed their lives.
The trust said it received dozens of emails alerting them to the auction.
Ex-serviceman Peter Haywood, aged 67, of Brixham, Devon, contacted the Express & Star about the sale and said: "It is totally wrong to be selling items like this. These are sons of the community of Wolverhampton and it's outrageous."
He added: "They gave the ultimate sacrifice and someone shouldn't be cashing in on it.