The party’s Newry and Armagh MP Mickey Brady said flying the flag was insensitive and would add further distress to the families of the IRA men who died in the Co Armagh village in 1987.
The eight men were killed as they attacked Loughgall RUC station with a bomb in a hijacked digger. A civilian was also killed in the ambush.
On Sunday, Sinn Fein’s Northern Ireland leader Michelle O’Neill caused a storm of controversy among IRA victims and unionists when she was guest speaker at an event in Cappagh, Co Tyrone, held for the eight IRA men.
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Mr Brady said: “Having recently attended a commemoration to mark the 30th anniversary of the Loughgall massacre, I’m appalled to learn that a British SAS flag has been reported as flying in the village.
“This shameful act of glorification will only serve to add further distress to the families of the nine men as we approach the 30th anniversary.”
Mid Ulster MP Francie Molloy added: “The tragic events of Friday 8th May 1987 will be forever defined as one of the saddest periods for the Republican family in County Tyrone. This is a sinister and provocative development which Sinn Féin has reported to the PSNI.
“Questions will be asked as to who has been responsible for this act, particularly as to whether former or serving members of the British forces were involved.”
Mrs O’Neill has come in for criticism over her attendance from both unionist politicians and victims of IRA violence for speaking at the event.
But Ulster Unionist MLA Doug Beattie MC also described Sinn Fein complaints about the flag as “the height of hypocrisy”.
Mr Beattie said: “Sinn Fein and the republican movement may well see the flying of the SAS regimental flag as provocative - but what do they expect? Their recent overt commemoration of those heavily armed IRA men hell bent on committing murder in Loughgall thirty years ago, was extremely provocative.
“They set the conditions and now they are complaining about the backlash. They should think about these consequences before they celebrate terrorism. Anything else is the height of hypocrisy.
“Sinn Fein can organise as many commemorations to remember dead IRA men as they want. That is entirely up to them. What they cannot control however, is how the rest of society chooses to remember the IRA - as a criminal gang whose stock in trade was sectarian murder.”