The video – which circulated around the Internet on Monday but has since been taken off YouTube – was recorded several years ago, LaBeouf's rep told E! online.
In it, LaBeouf appears to be at a house party where, in an attempt to entice his friend into a slapping contest, the star calls the friend an anti-gay slur – and gets hit in return.
"The videotape that is currently being circulated is several years old and captures Shia playing a game among friends in which he uses a derogatory word toward a friend," LaBeouf's rep continued. "He regrets having used the word in any capacity and is very embarrassed that this footage is being seen by anyone."
This isn't the first controversy in LaBeouf's young career. The actor, who stars as Harrison Ford's sidekick in Indiana Jones and the Kingdom of the Crystal Skull, was arrested for trespassing at a Chicago Walgreens last December (he was never charged).
LaBeouf, 22, later laughed off the incident, saying the arrest stemmed from a misunderstanding involving pimple cream after a long night of drinking.
Earlier this year, he was also fined $500 for illegal smoking.