Police briefly detained Galliano on Thursday evening in Paris' fashionable Marais district after he allegedly verbally accosted a couple in a bar. Galliano's lawyer has strongly denied accusations of anti-Semitism.
"The House of Dior declares with the greatest firmness its policy of zero tolerance with regard to any anti-Semitic or racist statement or attitude," Dior boss Sidney Toledano said in a statement on Friday.
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"Pending the outcome of the enquiry, Christian Dior has suspended John Galliano from all duties."
The altercation erupted at the La Perle cafe, popular with the gay and fashion community, between Galliano and a couple next to him around 9pm, a police source said.
France's Europe 1 radio quoted the couple, a man and a woman, as saying Galliano then allegedly made derogatory comments about them with reference to Jews and Asians.
"For the moment we don't know what led him to address the couple," the police source said. "We don't yet know if they knew each other or not."
Police detained him for questioning and he was found to have been drinking. The designer was released and taken home by his driver pending possible charges being filed.
German fashion magazine and website Sleek quoted witnesses as saying the altercation began when Galliano sat next to a couple at the bar who mistook him for a "bum when he tried to strike up a conversation with them".
The couple allegedly insulted Galliano, who initially ignored them but then allegedly insulted the woman and her bag, the witnesses said. As the dispute escalated, the couple called the
police.
Galliano's lawyer, Stephane Zerbib, told AFP the designer "formally denies the accusations of anti-Semitism made against him".
Galliano "is not at all in this state of mind (and) will explain later," Zerbib said, adding: "Legal action will be taken against those making such accusations."
"There was an altercation, Mr Galliano was verbally attacked, but at no point did he make any such insults, and we have witness testimony that backs this up."
Galliano's background
Gibraltar-born Galliano, 50, took over the creative helm at Dior in 1996.
He would have been focused this week on preparing his fall-winter collections for Christian Dior and his own label during next week's Paris Fashion Week.
It was not immediately clear what effect his suspension from Dior would have on fashion week.
The moustachioed designer has styled himself publicly as a neo-modern Edwardian dandy, assuming rock star poses at the end of his shows.
But backstage he is rather shy and more interested in discussing the technical aspects of his creations.
Galliano, born to a British plumber father and a Spanish mother, has been billed as one of the most influential designers of our time.
He attended London's renowned Saint Martin's College of Art and Design, where his 1984 graduation show, called Les Incroyables, was themed on the 1789 French revolution.
He moved to Paris in 1993. His often spectacular shows are inspired by history and his travels around the world.
In January, Galliano came out with the most masculine collection of any during the spring-summer Paris menswear shows, themed on Siberian winters, Russian exiles and the ballet dancer, Rudolf Nureyev.
A week later, for Christian Dior's most spectacular fall-winter haute couture show in years, he reached deep into the New Look heritage of the Paris fashion house with creations inspired by 1950s fashion illustrator Rene Gruau.
