"Milan can't become, on the eve of the Expo 2015, an Islamic city, a city of Gypsies, full of Roma camps and swamped by foreigners, a city that gives voting rights to immigrants in municipal elections," Berlusconi said on Monday.
"I don't think that we Milanese consider it a priority to build a beautiful mosque," Berlusconi said in a message posted to the website of his ruling conservative People of Freedom (PdL) party.
The leader of Italy's largest centre-left opposition Democratic Party Pierluigi Bersani met Berlusconi's inflammatory remarks with an ironic putdown.
"Your words are laughable..you're going to need to wear a burqa to avoid people recognising you in the street," he jibed.
This month's local elections taking place in Milan, Naples and other Italian cities are being seen as key test of the Berlusconi coalition government's popularity, two years before its mandate ends in 2013.
In a bitterly contested first round of voting in the northern business capital last week, the centre-left's candidate, former Communist Giuliano Pisapia bested incumbent conservative mayor, Letizia Moratti, taking some 48 percent of votes compared to her 42 percent.
Pisapia, branded a leftist extremist by Berlusconi has announced he is suing Moratti for claiming he associated in the past with far-left terrorists. The pair are due to face-off again in run-offs scheduled for Saturday and Sunday.
The issue of an official mosque is a politically charged one in Milan which has been a conservative stronghold for almost two decades. Moratti, a former national education minister from the PdL, says she opposes the construction of the mosque requested by Muslims.
A mosque in Italy's business capital woud create "a centre of attraction for Islamic groups from all over Italy who then would not be controllable," Moratti has stated.
Pisapia has criticised Moratti's position saying Milan should allow a proper place of worship for its Muslim community, who have been forced to hold prayers in makeshift venues such as garages and a disused cycle stadium.
Both candidates say several encampments on the outskirts of Milan mostly occupied by Roma Gypsies, which Milanese associate with crime, should be closed down.
Pisapia has blamed the squatter camps on negligence by the conservative city administration.