"We are not enemies of Mr Bachchan, but his picture on our national flag was an objectionable act and we ordered them to remove his picture from the flag," a local government official, Mirza Asif Baig, told Reuters on Friday.
"This place is reserved only for our own heroes," he added.
Telefun, a private call-in entertainment company, had posted the giant billboards round the city to promote a call-in quiz contest along the lines of an Indian television version of the US quiz show Who Wants To Be A Millionaire hosted by Amitabh Bachchan.
The billboards said the show would be aired from August 14 - the day Pakistan celebrates independence from Britain and partition from India.
Abdul Qadir, Telefun's marketing manager, said the company was complying with the authorities' directive.
"We have already started disassociating Amitabh Bachchan's picture from the national flag," Qadir said. "It was a mistake."
Qadir said Telefun had used Amitabh Bachchan's image because of the similar format of the quiz.
Although there is a long-standing ban on screening of Indian films in cinema halls in Pakistan, Amitabh Bachchan is as popular there as he is in India.
Indian films are easily available, however, on pirated CDs and are also aired on cable television channels in Pakistan.