Conservative Future (CF) member Matthew Lewis was criticised by the family after bragging about the stunt on his Facebook site.
In a statement released tonight, he said: "I unreservedly apologise to Mr and Mrs McCann for my actions.
"I completely regret my behaviour that night and since, and cannot express how sorry I am for the incredible hurt I have caused.
"Whilst my actions were not meant to be malicious, I fully understand the pain they have brought."
Mr Lewis attracted criticism after writing on Facebook that his Madeleine McCann costume had included a blonde wig, "pink pyjamas, a teddy bear and a vial of fake blood".
Other figures from Conservative Future joined in the joke, with one responding: "Is this a cunning (Baldrick style) plan to obtain the reward money?"
Tory chairman Caroline Spelman branded Mr Lewis's behaviour "totally unacceptable" and confirmed he had been expelled from the party.
"This offensive behaviour is not only shocking but intolerable and completely unacceptable," she said. "There is no place for this sort of person in the party."
The party is also understood to be examining whether action should be taken against other CF members involved.
Clarence Mitchell, spokesman for the McCanns, earlier called for Mr Lewis to issue a public and private apology to the family.
"The offensiveness of this activist's actions is almost beyond belief," he said.
"I know Gerry and Kate will be grateful that the Tory party has taken swift and appropriate action by ejecting him from the party.
"His actions are not only disgraceful in themselves, they will also cause great hurt to Kate and Gerry. I feel it is appropriate that he now apologises both privately and publicly to them.
"It is a complete disgrace that Madeleine's name and image should be made fun of in this way."
Mr Lewis - believed to be in his early 20s and a student at Queen Mary, University of London - resigned as chairman of Staffordshire CF last month in protest at internal reforms.
Images on the group's website show him campaigning with David Cameron for last year's Crewe and Nantwich by-election.
Mr Lewis was not answering his mobile phone today, but most of the exchanges remained visible on his Facebook profile until late this afternoon.
Page snapshots showing other comments were featured on the Tory Bear blog.
On New Year's Day, after the party, Mr Lewis told another CF member, Flick Cox, online: "There was a brief moment when I thought I might have gone too far with elements of the costume, but it was ok."
He added that another guest at the bash was dressed as Baby P, the toddler who died after a catalogue of horrific abuse.
"There may not be photos, I don't think anyone wants to risk being associated with them!" Mr Lewis went on.
Ms Cox suggested that he may have "pulled a Prince Harry" - a reference to the royal's controversial decision to wear a Nazi uniform to a fancy dress party in 2005.
She said she would "hate to have to end our friendship when I become an MP" if he got into trouble over the outfit.
Madeleine McCann went missing while on holiday with her family in Portugal in May 2007. She has yet to be found despite a massive worldwide hunt.
It is far from the first time Tories have found themselves in trouble after dressing up.
Last February two young activists in Scotland came in for widespread criticism after impersonating a master and slave at a party.
Brian Gordon, a Conservative councillor in the London borough of Brent, was also condemned after painting himself black to act as Nelson Mandela. Party researcher Emma Claire Pentreath, faced a backlash after pictures appeared on Facebook of her also painted black.
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