The letter entitled Educate First Nations to be modern citizens, questioned the accomplishments of the First Nations communities and depicted them as chronic underachievers.
That immediately sparked a furor on Facebook and other social media, where it was called racist, leading to the organization of Thursday's protest.
Mayor John Ruttan told the crowd he was disappointed at the paper's editorial slant, pointing out it ignored a historic a pre-treaty agreement signed yesterday.
"This was a very important day for Nanaimo. It was a very important day for the SFN (Suneymuxw First Nation)," Ruttan told the crowd.
"Did any of you read it in the headlines today in the Nanaimo Daily News? Did you read the story? No. Why not? It wasn't there," Rattan said.
The protestors demanded a front page apology and firing of the paper's managing editor, accusing the Nanaimo Daily news of repeatedly printing racist letters against indigenous people.
First Nations National Chief Shawn Atleo was outraged by the letter, saying it was a reflection of ignorance toward his community.
"That letter — absolutely outrageous — the outside example of the deep disconnect, misunderstanding and ignorance about First Nations people from coast to coast to coast — the kind of thinking that has created the advent of the Indian Act that led to residential schools."
The newspaper has since taken down the letter from its website, saying it should not have been published, but defended the author's right to free speech.
"In the Wednesday edition of the Nanaimo Daily News, a letter to the editor ran from Mr. Don Olsen, which has caused considerable concern among some of our readers," said the statement by Vancouver Island News Group division manager Hugh Nicolson.
"While we would defend Mr. Olsen's right to hold and express his opinion, the sentiments expressed were entirely his own and in no way reflect the views of the newspaper."
"The letter should not have run. We apologize for any distress this may have caused our readers."