The top Brexiteer was accused of “casual racism” over the joke at a Tory conference fringe event.
Mr Rees-Mogg made the quip during a pro-Brexit rally in Birmingham last night.
He said: All the countries who are least interested in their people call themselves ‘people's’, don’t they?
“So the People’s Republic of China? Oh, that’s communist.
“And the People’s Republic of Jam Jar, or something like that, of Libya, was what it was called when Colonel Gaddafi was in charge.”
The dictator Gaddafi renamed his country the Great Socialist People's Libyan Arab Jamahiriya in the 1970s.
It reverted to its original name after he was deposed and killed in 2011.
Labour MP Alex Sobel, a backer of the Best for Britain campaign, hit out at Mr Rees-Mogg, telling the Mirror: “This not only shows the same sort of casual racism Boris Johnson has displayed but also a disdain for the rest of the world which would leave us isolated and economically eviscerated if he is allowed his hard Brexit.”
And shadow minister Chi Onwurah joked: “It's their respect for other countries and attention to detail which will be such an asset for the Hard Brexiteers as they negotiate trade deals post-Brexit.”
The Rees-Mogg rally attracted queues round the block as Tory activists lined up to pay homage to the leading Brexiteer.