Jonathan Mathews was censured in an inquiry report by Lord Lester QC, but avoided expulsion from the local party after convincing a London region appeal committee that he fully accepted the criticisms.
Mr Mathews was the least culpable of those involved in producing leaflets that Lord Lester found exploited prejudice against Bangladeshis over scarce housing in the east London borough.
But his reprieve renewed embarrassment for the Liberal Democrats, who control the council, angered some Liberal Democrat MPs and sparked claims of a whitewash from Labour - in spite of a Lester report finding that two leaflets 'clearly implied support for a housing policy that would discriminate in favour of white residents'.
While Labour have contained adverse publicity, leaked minutes from an Isle of Dogs Neighbourhood Party meeting after last September's by-election record that one councillor, Eve Amor, believed Labour leaflets did not contain sufficient anti-BNP content. 'She did no work at all during the campaign because she felt the first leaflet (on housing) was racist.'
Wresting the Millwall seat from the BNP in the May council elections would be a damage limitation coup for the successful party. But Labour are likely to talk up the approval of Mr Mathews, a former chair of education, as further evidence of allegations that local Liberal Democrats privately reject the Lester report.
A leadership office spokeswoman said Mr Mathews, who is spending three weeks as an unpaid political adviser to Peter Hughes, the Liberal Democrat leader, had done valuable work with Bangladeshis. Paddy Ashdown, the party leader, told the annual general meeting of the London region last night that 'despite everything' the council had devolved power, tackled waste, improved housing and invested in schools.
The first priority was to stamp out the BNP, he said. 'The politics of race must not be allowed to get a grip again in London's East End. And provided that is the first aim of our campaign in the Isle of Dogs, then I will be campaigning there with all my strength.'Reuse content