The Advertising Standards Authority received 20 complaints about the ad, which shows people walking through a forest and then jumping into water. It was created by Lucky Generals.
The complainants believed the ad depicted "tombstoning" which they said was "very dangerous and could result in serious injury and death".
However Hostelworld denied the spot encouraged the activity, which it described as "people jumping into water from cliffs without prior knowledge of the potential dangers, such as the depth of the water, rocks below or strong currents in the water".
The company also said the ad was filmed at the Ik Kil cenote in Mexico, "a popular site of natural beauty, which was open to the public for swimming" and it made clear how deep the water was. Clearcast reiterated this and said tombstoning refers to jumping into "untested" areas.
The ASA noted that a number of people have been killed or seriously injured from tombstoning in the UK.
It ruled the ad was "likely to condone or encourage a dangerous practice" because one man in the film was beckoned to jump, and when he did so it was suggested that his behaviour was admirable.
The ASA ruled: "We considered that the man was being presented in a more positive light for having done something which might be considered dangerous."