John Cowan, who is said to have admitted paying cash to a cleaner claiming benefits, called the row a “storm in a tea cup”.
His suspension comes too late for him to be replaced on the ballot paper for South East Cambridgeshire.
A party spokesman said he hoped voters may “hold their noses” but vote Labour.
Mr Cowan told the BBC it was all “really a storm in a tea cup” adding that “one or two things… were misquoted and taken out of context”.
“There were one or two comments that with hindsight could have been made a bit clearer,” he said.
Mr Cowan said he would consider his position after the election.
He was expelled from the Liberal Democrats in 2004 over allegations he sent inappropriate emails to female political figures.
Labour’s election co-ordinator Douglas Alexander told a press conference in central London that the party was looking into how a man who had been expelled from the Liberal Democrats came to be selected as a parliamentary candidate.
The latest controversy includes an accusation that he stated on a message board he would not like any children of his to marry a Muslim.
In a further forum post attributed to him, Mr Cowan is alleged to have admitted paying a cleaner cash in hand because she and her partner were on benefits.
Labour said Mr Cowan’s actions were “totally unacceptable and well below what the party expects”.
A decision will now be made whether to expel him from the party.
A Labour Party spokesman said: “Everybody in the Labour Party is extremely angry about this.
“There is a feeling of anger in the party. They feel he has let down not just the party but ordinary party members.
“We will seek to make sure he is never a Labour Party candidate again.”
The Labour Party said it had checked the comments attributed to Mr Cowan before suspending him and, when confronted with the allegations, he did not deny them.
The South East Cambridgeshire constituency issued a statement saying members were “shocked by press revelations regarding John Cowan”.
“We believe he has let down all those Labour members and voters he sought to represent and welcome the swift action taken by the general secretary of the Labour Party to suspend John Cowan from office or representation of the party.”
Mr Cowan, who lives in Barnham Broom, near Norwich, Norfolk, was unavailable for comment on Monday.
The declared candidates for the South East Cambridgeshire seat are: Christian Peoples Alliance: Daniel Bell; Liberal Democrat: Jonathan Chatfield; Labour: John Cowan; UKIP: Andy Monk; Conservative: James Paice; Green: Simon Sedgwick-Jell; Independent: Geoffrey Woollard.