The American Freedom Defence Initiative agreed to remove the image of a kneeling Foley, dressed in orange, at the request of his family who said it would cause "profound distress."
The AFDI launched its USD 100,000 ad campaign in the New York transit system yesterday in what it said would show "the uselessness of the distinction between 'moderate' and 'extremist' Muslims."
The ad identified British rapper Abdel-Majed Abdel Bary as the extremist who killed Foley, although media reports suggest that Britain no longer believes he is a suspect in Foley's death.
But the Foleys' lawyer wrote to AFDI co-founder, writer and activist Pamela Geller, asking her to withdraw the advertisement and saying that their son had great respect for Islam.
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"The advertisement you are preparing to run seems to convey the message that ordinary practitioners of Islam are a dangerous threat," read a copy of the letter.
"This message is entirely inconsistent with Mr Foley's reporting and his beliefs," it added.
The face of the victim has been digitalised.
But Yerushalmi warned that some of the ads might still go out by transit personnel, although the campaign in San Francisco would be delayed to ensure none of the offending pictures run.
He said Geller understands the pain of the Foleys as a mother, as someone whose extended family was murdered by the Nazis and as the friend of Israelis "brutally affected by Islamic terrorism."
Advocacy groups, faith leaders and New York mayor Bill de Blasio had already criticised the ad campaign as inflammatory and anti-Muslim.