It was named after an early Christian saint but, to those aghast at its liberal ways, Santa Monica is better known as Soviet Monica, a city beyond comprehension, decency and now, after its latest outrage, forgiveness.

This California playground of Pacific surf, sunshine and sleek boutiques has, if you believe one side of the argument, just plunged a dagger into Christmas, gutted tradition and pushed America down a slippery slope to godlessness.

Or, if you believe the other side, Santa Monica has upheld the values of the founding fathers, rebuffed a plot to impose theocracy and scored a victory for reason.

The stage for this latest battle in the US culture wars is Palisades Park, a scenic patch of palm trees on a bluff overlooking beaches where Baywatch was filmed. Every Christmas for over half a century, the park hosted a lifesize nativity display of the birth of Jesus, filling a block with a 14-scene diorama which included crib, wise men and livestock.

This year, however, it will remain empty following a campaign by atheist activists who objected to a religious display on public property. Nativities will be confined to churches and private property.

"It's a form of asymmetric warfare," said William Becker, a lawyer and conservative advocate who represented the Santa Monica Nativity Scenes Committee in its losing battle with the city council. Militant atheists took a page out of the 1960s Berkeley radical playbook to target a cherished symbol of Christianity and tradition, he said. "These atheists are intolerant and they got a friendly government here to back them. It's the People's Republic of Santa Monica."

Becker accused "liberal Irish Democrats" and other leftwing factions in the city council of buckling following similar campaigns in other states against crucifixes and prayer in public places. "We're going down the slippery slope," he said.

In an article for a conservative magazine, he warned that Palisades Park was the latest park to be occupied by a leftist regime's ideological larceny. "Only now – plunging as we are with increasing velocity – do the tremors of our nation's mortality begin to beat their throbbing rhythms insistently," he wrote.

Hunter Jameson, chairman of the nativity scenes committee, said a "tiny group of determined ideologues" had manipulated a pliable council. "It's a very sad day. The original Grinch didn't want people to celebrate Christmas," he said.

The atheist campaign began several years ago when Damon Vix, a member of the Freedom from Religion Foundation, successfully lobbied for the right to mount his own booth in the park alongside the nativity. He erected signs which called religions fables, proclaimed "happy solstice" and quoted the founding fathers' arguments for separation of church and state. Atheists ramped up the campaign last year with multiple booths which mocked religion, including a supposed homage to the "Pastafarian" religion complete with its Flying Spaghetti Monster deity. The displays caused uproar.

The atheists were set to create even more rumpus this year after snaffling most booths in a first-come first-served lottery system, prompting the city council to ban all displays. "It became a war in the park. It was getting out of control," said Bob Holbrook, a council member.

Siding with one group against the other would have opened the door to expensive litigation, he said. "We get sued about twice a week over different things. Brown squirrels, pigeons, trees – for every special interest, we've got a group." As a Christian, Holbrook said he felt "extremely hurt" that he and other council members had been compared to Pontius Pilate.

Yibin Shen, the deputy city attorney, said the Palisades Park ordinance was "content neutral legislation".

Vix, who started it all, said he was very happy. "It was time to take a stand. This was a blatant violation of the separation of church and state, the principle our country was built on," he explained.

The decision corrected an anomaly in which a liberal bastion gave special treatment to a tradition dating to the McCarthy era, said Vix, a set builder. "This rights a wrong which was a relic of that age."

It was symptomatic of US polarisation that each side cast itself as a persecuted victim of intolerance. "Our rights are under assault. Our agenda is to preserve and protect the constitution and do everything within the law to prevent them establishing a theocracy over us," said Edwin Kagin, national legal director of American Atheists. A fifth of Americans say they have no religious affiliation, up from 15% five years ago, according to a Pew Forum on Religion & Public Life study released last month, but Kagin said he worried that many still believed in the Bible, a book which he said advocated stoning and slavery.

Daniel Archuleta, managing editor of the Santa Monica Daily Press (motto: "all the news that's fit to surf"), said the nativity battle pitted Santa Monica's decades-long liberal influx against the city's Catholic roots and conservative undercurrent.

"Some of the older guard still see it as a sleepy little beach town, whereas in fact it's a bustling metropolis. The irony of the nativity is that a lot of people thought it was tacky until it was taken away."