The advert, currently showing on TV, features a school Christmas play with children singing about who has bought them presents, revealing that their mothers do all the shopping.
The Advertising Standards Authority (ASA) has received 456 complaints that the advert ruins the idea that Santa Claus is behind all the presents that arrive for children on Christmas Day.
Only Phones4U's horror-themed advertising campaign has received more complaints this year, at just over 500 in total.
An ASA spokesman confirmed that viewers had complained that the ad "caused their children distress" because of "the implication that it is mothers who provide presents rather than Father Christmas".
However, the regulator said that after "careful consideration" it has decided not to launch an investigation into the complaints as the ad did not specifically claim that Father Christmas does not exist.
An ASA spokesman explained: "The ASA Council has decided that, as the ad did not make reference to Father Christmas or suggest Father Christmas did not exist, it was unlikely to cause distress to children and therefore we won't be launching an investigation."
A debate launched on YouTube about the ad has attracted more than 200 responses.
One user posted: "The ASA can only withdraw an advert which is deemed to cause 'widespread offence' and 'significant upset', and whilst it may not quite do both of these things, it is lazy, inane advertising from start to finish. All it succeeds in doing is inducing a 40-second, full-body cringe in anyone who has the displeasure of seeing it."
Another added: "Excuse me but it's a TV advert! No kid in their right mind will ever pay attention to it let alone will they be watching channels which this is aired on. If kids ask questions the mum will come with a cover because that's what mums do. End of."
Watch the controversial Littlewoods advert below: