Paddy Ashdown, the Liberal Democrat leader, said yesterday he would not intervene to stop power being devolved to the neighbourhood level in Tower Hamlets, where the BNP may take more seats. 'You cannot give people freedom unless you give them the freedom to be wrong,' he said.
But a senior party source said Mr Ashdown was speaking about handing power to the Labour Party.
Liberal Democrat sources said contingency plans were being discussed at local level to avoid the devolution policy handing power to the BNP if it won control of a neighbourhood on 5 May.
Plans included changing boundaries to ensure other parties kept control of the neighbourhood.
The Liberal Democrats have devolved decision-making and budgets to seven neighbour hoods. Two are controlled by Labour and five by the Liberal Democrats, who have overall control on Tower Hamlets council. The BNP holds one seat in the Labour-run Isle of Dogs neighbourhood after a by-election victory last September.
If the BNP wins enough seats to control one of the neighbourhoods, the Liberal Democrat leadership will face fierce criticism for handing power down to the BNP. Local leaders recognise such a transfer would be unacceptable.
The Liberal Democrats strongly opposed the BNP and called for a cross-party alliance to defeat them at the local elections.
Devolving power to the BNP would provoke a rift in the party and reopen the row over racism in Tower Hamlets, where some Liberal Democrats were expelled for issuing allegedly racist leaflets.
Mr Ashdown said the policy of devolving power to other parties would be extended beyond Tower Hamlets if the Liberal Democrats won control of other borough councils.
Mr Ashdown said: 'I don't intervene except if the party's constitution is not being adhered to or the council is behaving in a way that brings disrepute (on the party). In those circumstances, of course I intervene. That has nothing to do with the decentralised structure and the Tower Hamlets experience has had absolutely nothing to do with devolution.
'It is perfectly fair to say if (we) get control of Southwark, we would be handing power to the Labour Party in some of these areas.
'If that is what they are voting for, that is what they are entitled to get.'
He launched two documents for the party's local election campaign comparing the Liberal Democrat record in Tower Hamlets with the Labour record in Lambeth, which the Liberal Democrats attacked as a 'national scandal'.
The Tower Hamlet document says: 'Decentralisation increases consultation and empowerment. Carrying through the logic of decentralisation, the BNP victory in the Isle of Dogs by-election was a defeat for the ruling Labour Party there.'