Is using the word Gypsy racist or suitable material for a sketch show?

Gypsy
1. A member of a people that arrived in Europe in migrations from northern India around the 14th century, now also living in North America and Australia. Many Gypsy groups have preserved elements of their traditional culture, including an itinerant existence and the Romany language.
2. See Romany.
3. One inclined to a nomadic, unconventional way of life.
4. A person who moves from place to place as required for employment, especially:
a. A part-time or temporary member of a college faculty.
b. A member of the chorus line in a theatre production.

The comedian Ben Miller has told FHM magazine that he has been battling with the BBC over the use of the word "Gypsy" in a comedy sketch for his show with Alexander Armstrong, The Armstrong and Miller Show (which will be broadcast next month):

"We're having a debate at the moment with the BBC over whether we can say Gypsies, because they say Gypsies is a racist term, and you think "Yes it is but that's the point that we're making, that we were more racist in the 70s than we are now".

"We wanted to make fun of racist public information films from the seventies, and considered using the word "Gypsy" in that context. After discussing the issue both amongst ourselves and with the BBC, we decided to use a different word, so that the target (racism) was clearer and the joke was funnier. These discussions are a normal, healthy part of writing a comedy show and help to make sure that we end up with something we can all have a ruddy good laugh at."

The tale, not entirely surprisingly, is covered by the Daily Mail, along with other papers today, although it doesn't actually use the phrase "political correctness gone mad".

Gill Brown, of the London Gypsy and Traveller Unit, told the Mail: "Romany Gypsies are an ethnic group so it depends on the way you are using it. If you use it in the correct context it is not racist. However, it can still be used as a slur and that is racist. But I don't know how Ben Miller was using it. The word was used in a very racist and discriminatory way for many years and then what happened was that the term moved to traveller to be all encompassing. So anybody that could be described as a traveller or a Gypsy became a traveller."

A BBC spokesman said: "There are no banned words on the BBC; "Gypsy" isn't a banned word. This wasn't about the word itself, but about the sketch as a whole and the potential to cause offence. As with all comedy, it's about context, and in this particular case we felt there were less offensive ways of making the same joke."

In the post-Sachsgate world, is the BBC being forced to become over-sensitive? Or is this just sensible cultural awareness?