The Chancellor described as "disturbing" the revelation in The Independent yesterday that Conservatives had been in secret talks with the Alleanza Nazionale party.
Both the Liberal Democrats and the Pro-European Conservative Party also seized on the report as evidence of the Tories' "extremism" on Europe.
The Italian party, which has Mussolini's granddaughter as one of its MPs, claims it has shed its fascist roots and has become a credible centre- right force.
Eurosceptics want to form a new right-wing alliance with Alleanza Nazionale and the French Gaullists and sever the Tories' current links to the pro- euro European People's Party (EPP) grouping.
Edward Macmillan-Scott, the Conservative MEPs' leader, described the Italians as "neo fascist" and said that there was "no question" of forming a link in Strasbourg after Thursday's elections. However, Christiana Muscardini, the leader of the Italian party's MEPs, confirmed again that she had discussed with Tories the idea of a new right-wing coalition.
In a letter to Mr Hague, the Chancellor demanded to know which MPs, MEPs or officials had talks with the Italians and on whose authority they took place. "This appears to be yet another disturbing sign of the extremism of the Conservative Party. Instead of engaging in secret discussions, the Conservatives must now level with the British people," he said.
Michael Ancram, the Tory party chairman, said there had been no discussions with AN about a Strasbourg alliance. "To suggest otherwise is mischievous and wrong," he said.
Ms Muscardini told BBC Radio 4's The World at One programme that she and party president Gianfranco Fini had attended private meetings in London with Tory MPs.
Liberal Democrat leader Paddy Ashdown said: "There are those who say you know a party by the company it keeps, you now have a Conservative Party Mrs Mussolini would jump into bed with."
At a press conference, Mr Ancram refused to answer a question from The Independent about whether he could give a categorical assurance that the Conservatives would remain affiliated to the EPP.
He referred the question to Mr Macmillan-Scott, who said: "Our intention is to continue our relationship with the EPP, the largest centre-right grouping ... As to the actual arrangements, the decision as to our relationship with the EPP will be made by the party leader in consultation with elected candidates."
It emerged yesterday that Bill Cash MP, who admitted meeting Mr Fini in London, had other meetings with Ms Muscardini in Italy.
John Stevens, leader of the Pro-European Conservatives, said that Mr Hague was going down the path of turning the Conservative Party into an English nationalist party. "I would not have believed that the Conservatives would find themselves in serious negotiations with the political heirs of Mussolini, whose agenda includes racism, anti-Semitism. This is a serious development," he said.Reuse content