Tom Winnifrith and Jonathan Mathews argued their cases before a five-strong sub- committee of the Liberal Democrat London regional executive. An inquiry report drafted by Lord Lester, the QC and Liberal Democrat peer, recommended that both should have their membership revoked.
Mr Winnifrith was responsible for a leaflet depicting a black boxer, which the inquiry team found suggested that black people were responsible for problem estates where 'survivors of the Blitz' lived in fear for their lives. It was distributed in the Isle of Dogs during last autumn's Millwall by- election, which was won by the British National Party.
There was no appeal from a third councillor named in the report, Jeremy Shaw, who resigned his membership. His conduct included improperly distributing a fake Labour leaflet in 1990 which, the inquiry said, exploited racial prejudice over housing, and a 1991 press release urging Bengalis not to come to Britain.
Mr Mathews was involved in the production of two leaflets in 1990, one claiming Labour wanted to scrap the so-called 'sons and daughters' housing scheme, and another attacking Labour's 'crackpot 'anti- racist' schemes'.
The final verdicts are likely to do little to heal divisions between the Liberal Democrats and Labour, particularly in the run-up to May's local elections. Lord Lester's report claims that two Labour leaflets distributed during the by-election 'clearly implied support for a housing policy that would discriminate in favour of the white residents in the borough'.
Jack Straw, Labour's environment spokesman, whose complaints led to the inquiry, yesterday rejected claims that Labour needed to mount a similar investigation. 'The Liberals are trying to divert attention,' he said.
Only last month, however, the Commission for Racial Equality strongly criticised Labour-controlled Oldham council for taking no action to stop housing allocations for Asians being concentrated in a hard-to-let estate.
And last week, Liberal Democrats in Liverpool lodged a complaint with the leader of the city council, Harry Rimmer, accusing Labour of intending to run a 'dirty tricks' campaign against the Liberal Democrats in the May elections, while virtually ignoring the Tories.
The two opposition parties must bury their differences and create a broad-based coalition, or risk a permanent Tory one- party state, according to a prominent Liberal Democrat policy adviser. In a forthcoming issue of Renewal, a Labour political journal, Roger Liddle, a former special adviser to the Callaghan government and a defector to the SDP, attacks 'damaging traditions' in both parties 'as exemplified by the shock-horror of Labour Lambeth in the one case, and the disgraceful opportunism of Liberal Tower Hamlets in the other'.
But he warns that, even if Labour were lucky enough to win an overall majority with 39 per cent of the vote, it would not be able to push through a programme of national renewal and social justice without bringing on side a substantial section of centre-left opinion which the 20 per cent- plus vote for the Liberal Democrats would represent.
Both parties needed separately to improve their credibility, he said.