Local Alliance MP Naomi Long complained to the PSNI after the flag was put up at Island Street on Monday.
However, following discussions, the flag was taken down the next day.
First Minister Peter Robinson said the flag was “grossly offensive” erected in an “intimidatory act”.
The former east Belfast DUP MP said: “It is dreadful that some idiot doing this has the impact of people suggesting this might have local support.”
Naomi Lond MP said the appearance of the flag added “an even more sinister edge” to recent race-related incidents in the city.
She said a number of complaints from constituents regarding the flags had been passed to the Police Service of Northern Ireland for action.
“Yet again we see those who wish to bully anyone different from them, use flags and emblems to assert dominance and control over a community,” she said.
“To do so at all is to be condemned, but to put up these flags in broad daylight shows just how brazen the culprits are.
“To use flags hailing a hate group such as the KKK is sickening and lends a further menacing element to recent events.”
Mrs Long said it was essential that all right-thinking people united against “those who engage in racist, bigoted or otherwise intolerant behaviour”.
“It is also critical that the all-party talks this week stop ducking the issue of the use and abuse of flags and emblems for the purposes of intimidation, and face up to dealing substantively with this challenge to a shared future and to the rule of law,” she said.
DUP East Belfast assembly member Robin Newton said he was disgusted the flag had been put up.
“Only this week, representatives from across east Belfast came together to devise a strategy to combat racism,” he said.
“Such efforts represent the real face of east Belfast and not the tiny minority who believe they can display such intolerance and aggression.”
A police spokesman said: “The experience within policing shows that the approach most likely to provide for public safety and prevention of disorder is based on the principles of engagement between local communities working with agencies including local police and resulting in local decision-making.
“Until the Joint Protocol in Relation to the Display of Flags in Public Areas is updated, the Police Service of Northern Ireland will continue to work with communities and respond to any issue where there is a concern for public safety or where it is believed a criminal offence has occurred.”