A report in yesterday's Express said an undercover reporter was offered pounds 6.50 an hour by Charlotte Blacker, the Referendum Party agent in Putney, south-west London, to carry out promotion work allegedly described as "canvassing".
According to the newspaper, Ms Blacker, in whose constituency Sir James is to stand as a candidate, told an undercover journalist not to tell anyone that he was being paid for canvassing.
In a secretly taped conversation, she reportedly said: "It's our word against theirs."
Under the 1983 Representation of the Peoples Act, it is illegal to pay someone to canvass on behalf of an election candidate. It is not against the law to be paid for general party work.
After serving a writ on the newspaper, a spokesman for the Referendum Party said a claim that they had paid anyone to canvass illegally on behalf of Sir James was "wholly false". The article was part of a dirty tricks campaign against them, the statement said.
It said literature and videos given out in Putney referred to Sir James as the leader of the party and not as a prospective candidate for the constituency, and that so far there had been no canvassing for votes.
The penalty for paying canvassers is a fine of up to pounds 5,000 and a five- year ban on being allowed to vote.
Tessa Hilton, deputy editor of the Express, said the newspaper would defend the action fully: "It is rather depressing that the Referendum Party, whose slogan, after all, is 'Let the people speak', should act against a newspaper bringing an issue as important as this to public attention.
"We are confident that our account of procedures of the Referendum Party in Putney, the chosen seat of Sir James Goldsmith, deserves full scrutiny."
The Tory party chairman Brian Mawhinney said there should be an investigation into the claims.
Ms Blacker, 40, who was said by workers at the Referendum Party office near Putney Bridge to be unavailable for comment, spent 12 years as the Conservative agent for Kensington. She joined Sir James' party last year.
In 1989, she helped steer the Tories to a rare by-election victory when Dudley Fishburn was elected. According to former colleagues, Ms Blacker, whose sister, Lulu, is a friend of the Duchess of York, had already established a formidable reputation as a blunt speaker.
One said: "She is a domineering character who says exactly what she thinks. If she disagreed with someone at a meeting with senior officials at Central Office, she was liable to say 'That's bollocks'."
On one occasion, she responded to what she regarded as a dull speech by a party official by getting up and handing out biscuits as he was in mid flow. Another ex-colleague said: "Frankly, she doesn't give a shit. She has that public school, Sloane Square kind of confidence."
At one time, Ms Blacker, whose family are landowners in Hampshire, had a relationship with the armed robber turned social commentator, John McVicar.