The circular ad for Peta showed a caricature of Colonel Sanders holding a chicken by the legs in one hand and a kitchen knife pointing directly at it in the other.
The chicken appeared to be in distress and had many feathers missing, the knife dripped blood and the Colonel's clothes were covered in blood spatters.
The ad read: "KFC cruelty. The Colonel's secret recipe includes: live scalding, painful debeaking, crippled chickens. Peta KentuckyFriedCruelty.co.uk."
The website features a film with celebrities Reverend Al Sharpton and Pamela Anderson, and shows how KFC treats and kills chickens.
Text on the back of the circular included: "Cruelty directions: starve parent birds constantly and cut their beaks off with a hot blade. When the chicks are born, take them from their mothers immediately."
The person complaining received the circular through her letter box and challenged whether it was offensive, irresponsible and unsuitable for targeted delivery.
She was particularly concerned about its effect on children as it had caused distress to a child in her care who had picked it up.
Peta said, in its view, disturbing facts should not be censored simply because they made some people feel uncomfortable and there was no indication that the leaflet had caused serious or widespread offence.
It explained that it did not encourage the distribution of the leaflet through letter boxes or any form of untargeted delivery and pointed out that text on its website stated: "Don't drop leaflets into mailboxes".
The Advertising Standards Authority did not uphold the complaint concluding that it had not been targeted inappropriately and was unlikely to cause serious or widespread offence or distress to children.
It considered that only one complaint was likely to be an indicator that it had not been distributed widely in the same manner.
A KFC spokeswoman said: "We are committed to animal welfare, do not own or operate any poultry farms in the UK and use the same suppliers as many of the UK's leading supermarkets and restaurants, ensuring that they meet or exceed all relevant UK and EU welfare legislation.
"The ASA ruling was based on whether the leaflet was distressing and is not an endorsement of the information in it. We did not have the opportunity to defend our animal welfare policies as part of this process and strongly resent the ongoing misleading allegations Peta makes about our business in the UK."