The 'Bruno' star - who was due to hand out an Academy Award at Hollywood's Kodak Theatre on Sunday (07.03.10) - had planned to tease the director by dressing as blue alien Na'vi, a character from his film 'Avatar', and pretending to be pregnant with the filmmaker's child.
The 38-year-old comic actor has now been dropped from his presenting slot - which would have been his first Oscars appearance - even though James had given the comedy sketch his approval.
The movie maker told E! Online: "I don't know anything about that... I don't produce the Oscars. If they want to poke fun at Avatar on Sunday, that's OK by me."
James, 55, believes on stage mockery is a major Academy Awards tradition.
He explained: "The Oscars are a celebration of movies... even the gaffes and out of bounds stuff are all part of the fun."
Sacha's spokesperson Matt Labov has confirmed he has been cut from the ceremony over "creative differences" and is now staying at his home in London instead.
Matt said: "I hate to use the term, because it's so ubiquitous, but there were 'creative differences'. Nothing acrimonious, but both sides felt that since they couldn't agree, Sacha might as well remain in London."