(BBC) -- The group's mission in Washington DC expressed its "shock, dismay and outrage" and said the Trump administration misunderstood Africans.
The US leader made the alleged remark in a Thursday meeting on immigration.
But Mr Trump has denied using the language reported.
He has been backed by two Republicans who were at the White House meeting, but Democratic Senator Dick Durbin said Mr Trump called African countries "s******e" several times and used "racist" language.
On Friday, Mr Trump tweeted that his language he used at the private meeting with lawmakers to discuss immigration legislation had been "tough".
But he added that the words attributed to him were "not the language used".
It said the "remarks dishonour the celebrated American creed and respect for diversity and human dignity".
It added: "While expressing our shock, dismay and outrage, the African Union strongly believes that there is a huge misunderstanding of the African continent and its people by the current Administration.
"There is a serious need for dialogue between the US Administration and the African countries."
The pan-African grouping represents 55 member states throughout the continent. It succeeded the Organisation of African Unity - which originated in the decolonisation struggles of the early 1960s - in 2002.
(Photo: reuters)