A poster for a charity walk for cancer services, bearing the former first minister’s image, was put on a bonfire at Tullyally, Londonderry.
The bonfire was erected in the run-up to loyalist commemorations of the Apprentice Boys siege of Derry on Saturday.
Irish tricolours were also placed on the pyre.
Earlier this week, a republican, anti-internment bonfire in Newry, County Down, mocked murdered members of the security forces.
Police said they had liaised with the public in an effort to have the posters removed.
“While the posters were indeed removed for a period of time, they were put back in place before the bonfire was lit,” a PSNI inspector said.
“Police recognise the hurt this will have caused to individuals and are treating this as a hate incident.
Tweeting on Saturday, DUP leader and former first minister Arlene Foster condemned the burning of all flags and posters on bonfires.
She said: “Anyone burning flags or posters on bonfires needs to wise up.
“Bonfires / beacons were lit to welcome King William III to our shores.
“The modern tradition of lighting a bonfire was to commemorate this.
“Bonfires should be about welcoming rather than communicating hate.”
Deputy chief constable Stephen Martin also condemned this latest hate crime incident.
Mr Martin, who previously served as commander of Derry, said: “Tonight’s bonfire in Tullyally is just as disgraceful as last night’s in Newry.
“Showing contempt for the deceased is despicable & very hurtful to their families.
“Whether it is Loyalist or Republican is irrelevant.
“These shameful displays must be unequivocally condemned by all.
The son of the later Martin McGuinness tweeted: “Replace fear, hate and anger with love and you will be free.”
Sinn Fein Foyle MLA Karen Mullan described the bonfire images as “sickening” and described those behind it as “hatemongers”.
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