The invention discloses an oil-proof low-smoke halogen-free flame-retardant heat shrinkable label sleeve and a preparation method thereof. The label sleeve consists of the following components in parts by weight: 60 to 80 parts of matrix resin, 15 to 25 parts of linear low-density polyethylene, 5 to 15 parts of polymer compatilizer, 32 to 70 parts of phosphorous nitrogen series expansible halogen-free flame retardant, 0 to 30 parts of inorganic flame retardant, 3 to 5 parts of titanium white powder, 1 to 3 parts of lubricant, 0.8 to 2 parts of antioxidant and 1 to 2 parts of sensitizer. The preparation method comprises the following steps of: mixing the raw materials uniformly, extruding with a double-screw extruder, drawing, air cooling and granulating; extruding into a pipe through a screw extruder with a neck mould and a core mould, radiating, expanding, stretching, cooling, sizing, printing the label by using a heat transfer printer to obtain the oil-proof low-smoke halogen-free flame-retardant heat shrinkable label sleeve. The preparation method is simple; and the product has excellent flame-retardant performance and good oil resistance, produces little smoke, permanently preserves the label, and keeps good mechanical property, electric insulating performance and heat resistance.