Costas, an NBC sports announcer and late-night talk show host, announced over the weekend that he wouldn't participate in the March 24 pay-per-view show.
"I didn't think it would be in the best of taste," Costas said.
NBC's Paul Maguire, who was to participate with Costas and George Steinbrenner as part of an experiment with instant replay, will still appear at Wrestlemania VII. Others expected to appear: Roseanne Barr, Willie Nelson and Regis Philbin.
The Wrestlemania VII main event is Hulk Hogan challenging Sergeant Slaughter for the WWF title. To promote the bout, Slaughter has been portrayed as an Iraqi sympathizer with an Iraqi manager and Hogan as a flag-waving American zealot.
"I don't understand why people are suddenly up in arms," an NBC spokesman said of Maguire's involvement. "People have to understand the atmosphere this is all perpetuated in. They should know it's nothing but entertainment. I won't justify the way the WWF is promoting Wrestlemania VII, but pro wrestling has always made fun of blacks, Arabs, women and rednecks, to name a few."
Maguire wasn't available for comment.