The Conservative leader, Mr William Hague, was branded "pathetic" by a leading black Conservative last night for refusing to discipline the race row MP, Mr John Townend, provided he remains silent.
The Tory leader has threatened Mr Townend with expulsion from the party if he speaks out again, hoping the move would end a dispute that has intensified since the East Yorkshire MP suggested Britons were becoming a "mongrel race".
But Lord Taylor of Warwick said failing to strip the veteran MP of the party whip was "disgraceful".
Mr Hague issued the "draconian" threat of expulsion after the respected black peer warned he could be forced to quit the party over the issue.
The Tory leader hoped it would end the race row that has engulfed him since Mr Townend made his latest attack on multiculturalism.
He repeatedly argued that taking the whip from Mr Townend would be a mere "gesture", because he stands down as an MP at the general election.
However, Mr Hague decided to issue his ultimatum after Mr Townend's latest attack overshadowed his visit last week to his home turf of Yorkshire, where he was heckled on the issue, a senior Tory official revealed.
"Removing the whip would have been no more than a gesture because he will not be a Member of Parliament very much longer," the source said.
"However, what William has now decided to do is go further than that and say unless Mr Townend steps into line with the broad thinking of the party on this issue, he will be expelled, and that is not gesture politics."
Mr Townend, who has repeatedly insisted he will not be silenced, refused to comment last night.
But Lord Taylor was scathing about Mr Hague's "disgraceful" decision, which he said changed nothing.
"This is pathetic and typical of weak leadership", he said. "On at least three separate occasions Mr Townend has uttered racist remarks and William Hague has done nothing.
"What this decision amounts to is an acknowledgement that the party has a racist MP but that he can remain a Conservative MP as long as he keeps his mouth shut.
"This means William Hague can make all the clever speeches he wants to about race relations, but people will not forget that he refused to act against a racist MP in his own party."
Lord Taylor repeated his call for Mr Townend to have the whip removed and said: "I am still requiring the party to act. I still have some hope, the pressure is still building."
The Tory peer backed the leading black trade union leader, Mr Bill Morris, for his condemnation of Mr Hague. He raised the stakes yesterday by warning Mr Hague that failure to discipline Mr Townend made it "very difficult" for him to remain in the party.
"I have always said it would be too easy to walk away from it," he said. "I am determined to stay and fight but having said that, if a situation arises where it is obvious I cannot square remaining in the party with my conscience I would have to reconsider."
That decision, he said, "is not in my hands. It is being driven by John Townend and William Hague".
Lord Taylor's response is likely to dismay Mr Hague and his advisers, who have stressed the peer will not face disciplinary action despite the severe criticism he has aimed at them.