It def wasn't the government stopping them, they even flew the St George's cross on downing street which really is offensive to the other home nations as our flags have never been flown above downing street even when we (Scotland)were the only team in the world cup (I know that was a long long long time ago lol).
It was also just a rumour taht pubs couldn't fly flags and serve people with England tops, the police came out and said as much. It was a smurffy facebook rumour as always, probably started by the BNP or EDL.
It really isnt Muslims stopping the flag being flown but rather health and safety concerns as per these articles. As I said before many British Muslims identify themselves as such -British, English, Scottish, Welsh AND Muslim so they don't get offended by the flags because they are equally Muslim and British etc. Even the generic 'foreigners' tend not to be offended- i've never met any Muslims or people born outside the UK who are offended by the flags appart from when they are shoved in their face by the BNP or EDL.
These people are British and like/ hate Britain as much as teh rest of us. Of course there are some eejits who are racist, really hate Britain and it's people but they like their arch enemy the EDL are extreme and scum and should be ignored until they wither out and die out.