Photos from one of her two concerts last week published in local media showed the 57-year-old American mega-star draped in the Philippine flag.
While press reports said the audience roared its approval at the music icon, who was in the country as part of her global 'Rebel Heart' tour, Filipino authorities were less amused.
'Our flag law is strict as we want to instill respect for the Philippine flag,' presidential spokesman Herminio Coloma said in a statement.
'This should he made clear to organisers and performers in concerts so that there will be no repetition of the incident.'
Coloma said in an earlier statement to AFP that the government was 'keen' on banning the Queen of Pop from performing in the Philippines because of the controversy.
However Coloma later said the government did not want to ban her, and that the initial statement that it did was based on a wrong interpretation of comments by another presidential aide.
A 1998 law prescribes a one-year jail term, as well as a token fine, for wearing the Philippine flag 'in whole or in part as a costume or uniform'.
The flag flap was the second controversy provoked by Madonna's visit to the devoutly Catholic Asian nation.
A Catholic bishop last week called on the faithful to stay away from Madonna's sexually charged concerts, which often encompass religious themes, calling them the devil's work.
'Pinoys (Filipinos) and all God-loving people should avoid sin and occasions of sin,' Archbishop Ramon Arguelles said in a statement posted on the Catholic Bishops Conference of the Philippines' official website.
Arguelles said the concerts, Madonna's first in the Philippines, were among 'subtle attacks of the evil one'.
During her Manila shows Madonna gyrated around a stripper pole shaped like a crucifix, accompanied by dancers dressed as scantily clad nuns.
The controversial star did not forget the less fortunate on her Philippine trip, however, tweeting photos showing her visiting children at a Manila orphanage run by nuns.
The star, now touring in Singapore, has yet to comment publicly on the flag furore.
Officials of Music Management International, which produced Madonna's Manila concert, did not immediately respond to requests for comment.
From AFP Via Yahoo! News