A false color reduction system and method for color interpolation is disclosed in the present invention. The false color reduction system includes a red/blue color interpolation signal reference level estimator, a red/blue color interpolation signal noise analyzer and a red/blue color interpolation signal noise regulator. The red/blue color interpolation signal reference level estimator receives a RGB image array and a red/blue color interpolation signal of the RGB image array to generate a green difference signal. The red/blue color interpolation signal reference level estimator generates a red/blue reference level according to the green difference signal and an average signal. The red/blue color interpolation signal noise analyzer analyzes received signals to generate analysis result. The red/blue color interpolation signal noise regulator receives the analysis result to correct the red/blue color interpolation signal.