The recent concern over Prince Harry being caught using the term "paki" on a video raises interesting questions. How much can context and intention mitigate the use of language, which would be offensive in other contexts? What difference does the attitude of the recipient of the language make to the way those outside the conversation should judge it (such as the man nick-named "Sooty" at Cirencester Park Polo Club)? Would it matter if the video had remained private, rather than falling in the hands of the News of the World (whose concern is to sell papers, not raise moral standards)
I guess most people have friendship where the banter of conversation includes words that would be insulting in other circumstances. That includes terms that relate to people's origins, such as the Aussie/Pom exchanges during test cricket matches. The problem is where there are connections fresh in the corporate memory of prejudice and violence. For people of Pakistani background (and Indian / Bangladeshi / Sri Lankan) there will be painful recent memories of violence against their communities from racist thugs yelling "paki". I doubt the term can ever be redeemed, although some are trying, but white Anglo-Saxons aren't going to be the people who can do it.
The use of a word doesn't define someone as a racist for ever, and I'm sure there are racists who are very careful about the words they use. This episode is just a warning that carelessness can cause great offence, kindle fear (and prejudice) and remind us that although racism may be less overt in our society, it is still a fresh memory and sometimes current experience for many people