Mayor Elisabeth Herzog-von der Heide of the town Luckenwalde, near here, fired the intern after one day because she would not take off her headscarf, The Local reported.
"The Islamic headscarf is a means of expressing a religious worldview," Herzog-von der Heide was quoted as saying.
The mayor said that therefore, wearing a headscarf would violate the neutrality of the town hall, where crucifixes are also not allowed.
The Palestinian woman had been hired for a project called 'Perspectives for Refugees' and was set to work for six weeks.
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She said it would have been better to clarify this policy before hiring her.
A representative from the state parliament and Angela Merkel's conservative CDU party, Sven Petke, criticised the Social Democrat (SPD) mayor.
"There is no legal basis for this decision," Petke said, noting that the German Constitutional Court had ruled that personal beliefs and their connection to certain items of clothing should not be objectionable.
However, members of the far-right Alternative for Germany (AfD) party praised the decision to dismiss the intern.
"If the cross is not permitted in the rooms of the town hall, then there should not be special treatment for Muslims," said AfD state parliament representative Thomas Jung.
"The mayor deserves respect and not scolding for her uncomfortable decision," he said.
Wearing a headscarf to work, especially in legal or public sector work, has been hotly debated in recent years across Germany.
Germany's Constitutional Court ruled last year that blanket bans on teachers wearing headscarves were "constitutionally limiting".
However, more recently two major judges associations have said that they are in favour of banning headscarves in court.