The European Broadcasting Union has cut ties with China's MangoTV, after the broadcaster censored acts and blurred out rainbow flags in the audience.
Contestants from 19 countries took part in Tuesday's first semi-final of the competition being hosted by Lisbon, Portugal, ahead of Saturday's final.
LGBT culture remains taboo in China's entertainment industry where same-sex relationships are banned from television screens.
Chinese censors chose not to broadcast Ireland's entry into the competition - singer Ryan O'Shaughnessy performed the song 'Together', in an act which featured two male dancers depicting a love story.
Albania's performance was also not featured, reportedly because many of the performers had tattoos.
With its high kitsch content, Eurovision has long been popular with gay fans, and rainbow flags representing gay rights are a common sight at the finales alongside those of participating nations.
Austrian bearded drag queen Conchita Wurst shot to fame after winning the Eurovision Song Contest in 2014 with her song "Rise Like A Phoenix" and used her platform to campaign for gay rights.
The European Broadcasting Union (EBU) issued a statement following the broadcast, which announced the immediate termination of their contract with the Chinese broadcaster.
"On the 9th of May, Chinese broadcaster Mango TV broadcast the first semi-final of the 2018 Eurovision Song Contest, but two performances were censored. This is not in line with the EBU's values of universality and inclusivity, and our proud tradition of celebrating diversity through music," the statement said.
"It is with regret that we will therefore be immediately terminating our partnership with the broadcaster and they will not be permitted to broadcast the second semi-final or the grand final."
Representatives from MangoTV, with exclusive rights to telecast the show in China, could not be reached for comment.
A spokesman for parent company HunanTV told AFP that they "weren't aware" of edits to the Eurovision broadcast in China.
China's media watchdog in January banned tattoos and other "decadent" subculture elements from broadcasts, as it cracks down on what it sees as behaviour contrary to the ruling Communist Party's "values and morals".
Chinese football players with tattoos were forced to wear bandages on their arms or long sleeves to cover up their ink-work during games in March, according to media reports.
The Eurovision Song Contest will screen across SBS and SBS On Demand from May 9 -13. For full screening details, and to rate the performances, head to www.sbs.com.au/Eurovision