The Liberal Democrats reported councillor Ellenor Bland, who stood as a Tory candidate for Swansea East in the last election, to the Commission for Racial Equality, over the message sent from her email address to council colleagues. They said it showed "deeply unpleasant elements" in the Conservative Party.
Party managers immediately suspended Mrs Bland over the email, which included a poem about immigrants coming to Britain to claim benefits and a cartoon of the white cliffs of Dover emblazoned with the words: "piss off - we're full".
Boris Johnson, the party's gaffe-prone higher education spokesman, was also forced onto the defensive when it emerged the poem, which featured on a neo-nazi site, had been on his website.
The text, entitled "Illegal Immigrants Poem", also appears on a string of other websites, including the Stormfront white supremacist site. It describes a migrant coming to Britain, claiming benefits then inviting their friends and family to take over a whole area after white neighbours move away.
The text said: "Fourteen families, they moving in, but neighbours patience wearing thin. Finally white guy moves away. Now I buy his house, then I say "find more aliens for house to rent" and in the yard I put a tent.
"We have hobby, it's called breeding. Welfare pay for baby feeding. Kids need dentist? Wife need pills? We get free! We got no bills!"
It adds: "We think UK darn good place. Too darn good for the white man race! If they no like us, they can scram. Got lots of room in Pakistan!"
Mrs Bland denied sending the email, which was signed "Oh Yes! Ellie". Her husband David, also a Tory councillor, said he forwarded the message as a "light-hearted" joke and said he regretted any offence.
It emerged that the same poem had been posted on Mr Johnson's website. He insisted he knew nothing of the material. He said: "It's an utterly dreadful poem and I condemn it unreservedly. I had absolutely no knowledge it was on my website. Hundreds of people post material into the site and this one slipped through the net."
Edward Davey, the Liberal Democrat campaigns chief, said: "It is totally unacceptable for elected representatives to be distributing this kind of material. Racism has absolutely no place in British politics and I am asking the CRE to advise on what further action can be taken.
"If David Cameron wants to retain any credibility he must immediately take the strongest action against the person responsible. Despite Cameron's best PR efforts, the Conservative Party continues to contain some deeply unpleasant elements."
A Conservative spokes-man said no action would be taken against Mr Johnson but confirmed that Mrs Bland had been suspended. Senior party sources indicated that: "She is going to find it very difficult to talk her way out of this one."
A spokesman said: "The Conservative Party disassociates itself entirely from the sentiments in this poem. Ellenor Bland has been suspended from the candidates' list and from the party pending a full investigation."
Mrs Bland, who runs a clothes shop in Wootton Bassett, Wiltshire, said: "I haven't sent anything out which I'm accused of sending.
"I didn't. Someone else did. My email address is something that's used by my husband too. It's not my personal email account."
She added: "From what I remember of it, it was a very light-hearted poem.
"If anyone wants to accuse someone of being racist, we have Asian friends and we work well together and all accept each other's different ways."
Mr Bland apologised for forwarding the poem, but denied holding racist views.
He said: "I sent it off to a few friends as a light-hearted matter. Neither of us are racist whatsoever. If it has caused any offence, it has been taken the wrong way."
A 'light-hearted' joke?
I cross ocean poor and broke
Take bus, see employment folk.
Nice man treat me good in there.
Say I need to see welfare.
Welfare say, "You come no more, we send cash right to your door."
Welfare cheques - they make you wealthy! NHS - it keep you healthy!
By and by, I got plenty money.
Thanks to you, British dummy!
Write to friends in motherland.
Tell them "come fast as you can".
They come in turbans and Ford trucks.
I buy big house with welfare bucks!
They come here, we live together.
More welfare cheques, it gets better!
Fourteen families, they moving in, but neighbour's patience wearing thin.
Finally, white guy moves away.
Now I buy his house, then I say,
"Find more aliens for house to rent."
And in the yard I put a tent.
Everything is very good, and soon we own the neighbourhood.
We have hobby, it's called breeding. Welfare pay for baby feeding.
Kids need dentist? Wife need pills? We get free! We got no bills!
Britain crazy! They pay all year, to keep welfare running here.
We think UK darn good place.
Too darn good for the white man race!
If they no like us, they can scram.
Got lots of room in Pakistan!
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