A file will go to the Crown Prosecution Service after effigies of gipsies in a caravan were burnt at a bonfire celebration.
The tableau, created by members of the Firle Bonfire Society, was condemned by traveller and race relation groups as a racist slur.
It was burnt as part of Guy Fawkes Night celebrations in the village last Saturday.
Chief Superintendent Paul Pearce, Divisional Commander of East Downs, said recent events in the police service had highlighted the need for a positive anti-racist and anti-discrimination stance.
He said: "Sussex Police is overtly hostile to those who discriminate on the grounds of race, religion, skin colour, sexual orientation, disability, gender, social class or any other inappropriate factor.
"A thorough investigation is already underway that will consider all the evidence available from the celebrations on Saturday evening in Firle.
"At the conclusion of the investigation, which we hope will be swift, we will submit a file to the Crown Prosecution Service for them to consider whether a criminal prosecution is pursued."
Society members defended their creation, saying they had been misrepresented.
They said the tableau was a comment on the frustration villagers felt with the local authorities when a group of travellers descended on the village earlier this year.
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