A headteacher secretly reported a couple to social services after they complained their daughter had been bruised at school.
Council chiefs are investigating after Gene Huie called in child protection services when the couple raised fears about their daughter.
Waltham Forest council has replaced the head after admitting she broke the rules by going behind their back.
Diane and Peter Cooke said their four-year-old daughter Chloe could have been taken into care mistakenly as a result of the incident.
The couple complained to the school when their daughter, who has speech problems because of a cyst on her throat which has now been removed, twice came home with bruising.
Ms Huie told them there was no evidence the injuries were sustained at school, but the school then reported the case to the child protection team without the parents' knowledge. Guidelines state that discussions must take place with the families concerned before the matter is referred to social services.
Mrs Cooke, a 36-year-old nursery assessor, told the Standard: "We were really angry and upset. Chloe could have been taken away from us. We don't know what extremes the school would have gone to.
"Children do fall and do have bumps and grazes and they should be allowed to have that. She got a broken arm recently and my first reaction was 'how is the school going to feel about that?' As a parent I should not have to feel that way.
"It has affected my family and my job, I could have lost my job and my family could have been taken away."
Mr and Mrs Cooke only found out that they had been reported to social services when they were sent an official form in January so they could take part in a mock interview to help council officials prepare for an Ofsted inspection. It contained a reference to the fact that the family had been referred to social services.
A spokesman for Waltham Forest council said the parents had made an official complaint. The council investigated and issued an apology.
Councillor Saima Mahmud, cabinet member for children and young people, confirmed that Ms Huie is absent from Whittingham Community primary school in Walthamstow.
A troubleshooting "super-head" from a nearby school has been brought in.
She said: "To ensure stability for pupils, parents, carers, teachers and the wider community at Whittingham School, we have asked Pat Davies, head teacher of Chingford Hall Primary, to help support leadership at the school."
Ms Huie refused to comment when approached by the Standard at her home in north London.