It seems that others are also experiencing the same problem. One person noted that the feature worked fine in watchOS 1.0 and has only caused restarts since he updated to watchOS 1.0.1 (current version).
Re: crash when muting call on Apple Watch
It may be worth contacting Apple Support:
https://www.apple.com/support/watch/contact/
Or at least letting them know that you are also experiencing the same problem:
https://www.apple.com/feedback/watch.html
watchOS 2.0 is due for release this Fall / Autumn.