The couple were in attendance at the BAFTAs at the Royal Albert Hall when Pegg made the joke.
Presenting the Bafta Fellowship Award to Mel Brooks, Pegg was joined by Nathan Lane, who pointed out that Brooks is “really Jewish”.
The 46-year-old Hot Fuzz actor then said: "This is the man who gave us singing and dancing Nazis.
“He gave us Hitler on ice. Hitler on dry land. He gave us Hitler on Broadway. He's definitely got a thing about Hitler…"
Pegg continued: “I mean, who doesn't, right? That's the thing about Hitler, they never tell you about the good stuff. Anyway, back to Mel…"
The entire auditorium could not believe the remarks as Prince William, the president of Bafta, was stood to the side of the stage having just delivered a speech.
Simon Pegg makes a joke about Hitler at the BAFTAs 2017
Simon Pegg and Nathan Lane present an award at the BAFTAs 2017
BAFTAs 2017: Best and worst dressed
Sun, February 12, 2017
BAFTAs 2017: The best and worst dressed from star-studded red carpet at the Royal Albert Hall.
1 of 54
Get Quotes on Home Insurance
BAFTAs 2017 in pictures
Simon Pegg and Nathan Lane present an award to Mel Brooks at the BAFTAs 2017
Brooks accepted his award after Pegg’s awkward speech, and told a story regarding President Donald Trump’s travel ban, and having freedom to roam the world as a Jewish man.
“I got to the airport 24 hours ago. They asked for my passport,” said Brooks. “I’d forgotten it. Seriously.
“The reason I forgot my passport was because I don’t see England as a foreign country. I just see it as a vast extension of Brooklyn that speaks better.”
The BAFTAs is available to watch on the BBC iPlayer now.