The comedian mused on the subject on HBO’s Real Time With Bill Maher on Friday.
Cleese, who was on the show to promote his memoir So, Anyway, was led into the matter by Maher who gleefully asked him: “Let’s bitch about political correctness.”
Cleese complied, saying: “It’s so awful isn’t it. It starts out as a halfway decent idea and then it goes completely wrong.
“I used to go out and do these race jokes. I’d say 'The French, you know, why did the French have so many civil wars? So they can win one now and again'.
“'Why are Australians so well balanced? Because they have a chip on each shoulder…' you know, I used to do these jokes.
“And then I say ‘There were these two Mexicans…’ and the whole place is aghast.
“I make jokes about Swedes, Germans, French, English, Canadians, Americans… why can’t we make jokes about Mexicans?
“Is it because they’re so feeble that they can’t look after themselves? It’s very, very condescending.
“Who are the people you can’t make jokes about?”
Quick as a shot, Maher replies with a knowing laugh: “Muslims. Try that, see what your Twitter feed says.”
A giggling Cleese says: “That’s not saying that you can’t, that just means they’ll kill you.”
"Oh yes, I’ve said that. I’ve made jokes like ‘It’s a religion of peace… there’s a piece of you over there, there’s a piece of you over there'", Maher responds.
Cleese cracks up, as does the audience, but the 75-year-old quickly makes the distinction he was referring to fundamentalists.
He said: “I think it’s terribly important. But the problem is if you make jokes about people who are going to kill you… there is a sort of tendency to hold back a little, isn’t there?
“I think any kind of fundamentalism is terribly funny because… the thing about fundamentalism is it’s taking whatever the book is, the Quran, the Bible, absolutely literally.
“I’ve met some pretty smart people in my life and not one of them was literal-minded.”
“So do we say: ‘Jesus said these things, but of course Jesus was very, very literal-minded so he would want these things to be interpreted absolutely literally?' No, no he was smarter than that."
Maher interjects: “If you’re going take anyone literally I would take him literally because he was a promoter of peace… though he could be cranky too. He said things like: ‘If you don’t come to God through me you will burn,’ which is cranky. But in general he’s nicer.”
Maher has previously been accused of religious stereotyping, most recently by the actor Ben Affleck.
Affleck appeared on his show alongside outspoken author and atheist Sam Harris in October, describing their views as “racist” and “gross”.
Harris stated: “We have been sold this Islamophobia, where criticism of the religion gets conflated with bigotry towards Muslims as people. It’s intellectually ridiculous.”
Affleck retorted: “Hold on – are you the person who officially understands the codified doctrine of Islam? It’s gross and racist. It’s like saying ‘Oh you shifty Jew!’
The show culminated with Maher shouting about ISIS: “They will fucking kill you!”
What O’Reilly appeared to have overlooked was Affleck’s central argument that ISIS are not representative of Islam and that Muslims should not be blamed for the group's violence.
Earlier the Gone Girl star said: “How about more than a billion people who aren’t fanatical, who don’t punch women, who just want to go to school, have some sandwiches, pray five times a day and don’t do any of the things you’re saying of all Muslims. It’s stereotyping.
“Some of them do bad things and you’re painting the whole religion with that broad brush.”
Maher asked: “All these billion people just don’t hold these pernicious beliefs?”
Affleck replied: “They don’t,” to which Maher responded: “That’s not true Ben, that’s just not true.”
Maher later defended himself against accusations of bigotry in an interview with Salon magazine, claiming: “I’m the liberal in this debate.”