Gamers are scoffing at the decision, saying that advanced technology has made it commonplace in the gaming world to let players switch sides and play the bad guy.
"Medal of Honor" by Electronic Arts, a major game developer based in California, hits stores Oct. 12.
After public protests, including by British Defense Secretary Liam Fox, U.S. military officials decided not to stock the game in any of the nearly 300 base exchange shops.
Fox said last month that he was "disgusted and angry" by what was a "tasteless product." Fox called on retailers to show their support for the troops by not selling it.
"At the hands of the Taliban, children have lost fathers and wives have lost husbands," Fox said. "It's shocking that someone would think it acceptable to recreate the acts of the Taliban against British soldiers."
The game also will not be sold at any of the 49 GameStop stores located on various U.S. military bases. Troops will be allowed to own copies, but they would have to buy them off-base.
"We regret any inconvenience this may cause authorized shoppers, but are optimistic that they will understand the sensitivity to the life-and-death scenarios this product presents as entertainment," said Maj. Gen. Bruce Casella, who commands the Army & Air Force Exchange Service, which oversees more than 180 base exchange shops.
Casella made the decision last week, with the Navy quickly following suit. Kathleen Martin, a spokeswoman for the Navy Exchange Service Command, said the game won't be sold at any of the Navy's 104 exchange shops "out of respect for the men and women serving and their families."
Past versions of the 11-year old "Medal of Honor" game have been set in World War II, allowing players to act as either members of the Allied force or the Nazi regime.
The latest version is set in modern Afghanistan, where some 140,000 U.S. and NATO troops are fighting the Taliban. The story is told through a small group of characters known as "Tier 1" operators, elite fighters who take their orders directly from the president and defense secretary.
"Operating directly under the National Command Authority, a relatively unknown entity of hand-picked warriors are called on when the mission must not fail," according to an online description of the video game by Electronic Arts.
The website does not advertise the fact that the multiplayer version allows a player to role-play as a member of the Taliban.
One online promotion features video interviews with Special Operations personnel who the company says served as consultants to improve the authenticity of the game. The faces of the men interviewed were blurred and their names not given.
"By me being a part of it, I at least have some say on how the community is represented," one man says.
Electronic Arts did not immediately respond to a request for comment. Spokeswoman Amanda Taggart was quoted last month by the Sunday Times as saying video gamers routinely play both good guys and bad guys.
"Most of us have been doing this since we were 7: Someone plays cop, someone must be robber," the newspaper quoted her as saying.