The grey uniform and cap, recognisably symbols of the American Confederacy, went on sale in an “American History” collection that featured Revolutionary War-era garb, fireworks, and an Abe Lincoln stovepipe hat and beard.
Incidentally, two British army Revolutionary War items, a redcoat uniform and cap, also were removed.
A Microsoft representative gave Kotaku this statement:
Xbox LIVE Marketplace offers a wide variety of avatar items. We have received member feedback on a recent avatar collection, as a result we have removed items from our marketplace. We apologise for any issues this may have caused.
As the American Civil War was fought over slavery, Confederate symbols are sometimes taken as a racial provocation. They have historically been used by white supremacist organisations, and also have a history as symbols of segregationists and their sympathisers.