Green used the racially offensive term in an interview with the Scottish Sun on Sunday.
Discussing political correctness, Green told the paper: “The sectarian element of the Old Firm has been a hard thing to get used to.
"That is something that I’ve found truly amazing and hugely surprising to find this divide in Scotland. It is a completely new concept to me.
"I was brought up in a mining community where whether someone was black, white, Catholic, Salvation Army, Protestant, made no difference.
"When I played at Worksop Town, the other striker was ‘Darkie’ Johnson. Now if I say that today I could go to jail.
"You know, Imran (Ahmad, Rangers business partner) will come into the office regularly and I’ll say ‘How’s my P*** friend?’"
Green's comments have led to criticism from Show Racism the Red Card.
The organisation's chief executive, Ged Grebby, told the BBC: "The comments of Charles Green are very ill-advised and someone in his public position should really know better than to use this kind of racist and offensive language.
"The use of the term 'P***' is highly offensive and it is something that we at Show Racism the Red Card are trying to educate young people against.
"For the CEO of Rangers to use the term in any context is not helpful as it sends out the wrong message to young people."
Green has repeatedly attracted unfavourable media coverage this season, with his unfavourable appraisal of Ally McCoist's team and bullish comments over a possible move to England attracting criticism.
In a statement, Green said: "It is unfortunate that Show Racism the Red Card has fallen into the trap of taking something out of context and giving a knee-jerk reaction. In the interview, I referred to the fact we are now living in a politically correct world where words and phrases that were once used are no longer acceptable.
"My use of the word 'P***' was when I was referring to how I sometimes warmly address my colleague and friend Imran Ahmad when we meet, something we both know is light-hearted. I deplore racism and sectarianism and this football club does a huge amount of work in this area to help eradicate these problems."
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