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In a tearful post-defeat interview, she said she “wasn’t expecting to see him” but would “speak to him sometime next week to settle our differences”.

Mrs Chijoff said: “The last week has been horrendous. This obviously isn’t how I thought things would end up. I thought the pamphlets were appalling. I was shocked and extremely upset that they had done that.”

The recriminations are intensifying in the Liberal Party over the bungled attempt to smear Labor. Liberals in other states are furious, saying it highlights the poor campaigning standards of the NSW division and its inability to heal bitter factional divisions.

The former member for Lindsay, Jackie Kelly, whose capture of the seat in 1996 made her a personal favourite of John Howard, is in the firing line.

Ms Kelly’s husband, Gary Clark, was also involved in the dirty tricks campaign, photographed on newspaper front pages distributing a bogus leaflet from a fictitious Islamic group claiming Labor wanted the Bali bombers forgiven.

Ms Kelly tried to laugh off the affair, describing it as a “Chaser-style prank” and a break from letterboxing the boring standard Liberal material. That ploy failed miserably. Mr Howard distanced himself from his protegee. But the scale of the Lindsay defeat - a 10 per cent swing to Labor in two-party terms - has deepened the anger. On election night the Liberal senator Mitch Fifield lashed out at Ms Kelly.

“I saw that the Prime Minister said a couple of days ago that he was still quite fond of her,” Senator Fifield said. “I’m not, and I’m sure there are a lot of Liberals around Australia who are not either.”

Ms Kelly admitted on the Seven Network that she had erred badly. “I made a very clumsy effort to explain away his behaviour, but it just escalated the matter and made it worse. I’m not going to disparage my husband on national television. I’m damned if I do and I’m damned if I don’t.”

A forlorn Mrs Chijoff packed away her campaign posters and corflutes in Penrith yesterday, and her husband and Mr Clark remained in hiding. Having told reporters on Saturday she had kicked her husband out, she refused to comment further.

But her parents, Kay and Trevor Correy, said they were shocked and disgusted at their son-in-law’s involvement.

“We are a mixed-race family; we are not racist. I am so angry - I don’t know what I would do if I saw him,” Mrs Correy said.

Mrs Chijoff, a former staffer to Ms Kelly, continued to deny the pamphlet scandal cost her the seat, even as senior Liberal figures said it had been the final nail of the Coalition’s re-election campaign. “There was obviously a large swing, and I think people had made up their minds anyway,” Mrs Chijoff said.

While the Liberals were always going to struggle to retain Lindsay after the retirement of Ms Kelly, voting figures confirm the party has taken a pummelling. Labor’s primary vote soared by 12.2 per cent, while the Liberal vote went backwards by 7.7 per cent.

The mood at the Liberal function at Nepean Rowing Club was funereal. Campaigners and family members watched tearfully as the results came in.

Many of those who had a hand in the remarkable triumphs of Ms Kelly did not show up on Saturday night, while those who did were still in shock.

“I vomited when I found out,” said a 16-year Liberal member, Wendy Anderson. “It was just such an incredibly stupid and unthinkable thing to do, and the fact that Jackie’s husband was involved has really gutted us.

“We haven’t all met since the story broke. We’re all still wondering who leaked it. It looks like people had made up their minds, but this must have made a difference.”

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As it also emerged Labor caught the culprits in the act after a tip-off from a disgruntled Liberal Party member, it was revealed Greg Chijoff was one of those caught dropping the bogus pamphlets in letterboxes in St Marys.

He was forced to resign from the Liberal Party yesterday. Jeff Egan, a member of the party’s NSW state executive, was expelled.

Despite being photographed with the gang, he claimed he did nothing wrong.

“I categorically deny distributing any material that was not authorised in accordance with the Electoral Act,” he said.

His lawyer would not say whether this meant Mr Egan was claiming the offensive pamphlets were authorised by the party, which the party and John Howard angrily rejected.

The other high-profile member of the gang, Gary Clark, the husband of the retiring Liberal member Jackie Kelly, was never a party member, but has been kicked off the campaign.

Mr Howard was livid yesterday but rejected calls for Ms Chijoff to be dumped as the candidate for Lindsay because there was no evidence to link her to the plot.

“You should not automatically visit upon her the errors of her husband,” he said.

Mr Chijoff released a statement admitting his “political and moral stupidity” and said neither his wife nor the NSW Liberal Party director, Graham Jaeschke, were aware of the plot. Mr Clark released a statement exonerating his wife and Ms Chijoff.

The group met at Mr Clark and Ms Kelly’s Penrith home on Tuesday night before setting off to deliver the pamphlets.

Ms Kelly further infuriated her former colleagues by ignoring orders to say nothing, and instead did a round of interviews yesterday to boast it was a joke.

“If you read it you would be laughing. Most people who have read it have sort of said that’s a Chaser-style of prank,” she said.

Mr Howard upbraided her several times and stressed the bogus pamphlets were not authorised by the party.

“I’ve condemned it, I’ve dissociated myself from it, I think it is stupid, it’s offensive, it’s wrong, it’s untrue,” he said. “What more can I do.”

Federal police began investigating the material which purported to be from the non-existent Islamic Australia Federation and lauded Labor for supporting the Bali bombers and supporting the construction of a local mosque. The amateurish document contained childish spelling errors, carried an old Labor logo and no Liberal Party authorisation.

The Labor leader, Kevin Rudd, said the whole episode underscored why a change of government was needed. “I think it says everything about the negative campaign we’ve seen from the Libs this campaign,” he said.

The Labor candidate for Lindsay, David Bradbury, said Ms Chijoff needed to prove she had no knowledge of the plot. He demanded to know whether taxpayers’ money or resources were used to produce the pamphlets.

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Howard calls this saving Australia from political correctness. Yesterday at the Press Club he was at it again, boasting how he’d done away with “the overdose of political correctness” afflicting the nation when he came to power.

That’s when Howard’s way with race came down from the Territory, with the pollster Mark Textor and Shane Stone, the former chief minister who became Liberal Party president. Toying with Pauline Hanson, sabotaging reconciliation and stopping the Tampa drove a wedge deep into Labor ranks.

Playing with race became Howard’s trademark. So were his denials. His hand was always on his heart. The Prime Minister reassured us we were not racists. Nor was Hanson, as she denounced Asians and Aborigines. Nor were redneck Coalition MPs who never had his knack of dog whistling their messages.

Hammered by questioning yesterday Howard declared: “I do not think for a moment that racism is an attitude of mind of the Liberal Party.”

Maybe not. But the last dozen years have seen the party under his leadership willing to use race as it hadn’t been used in federal politics since the 1960s.

Howard knows this country intimately. When his favourite broadcaster, Alan Jones, was nailed in April this year by the Australian Communications and Media Authority for making statements “likely to encourage violence or brutality” in the lead-up to the Cronulla riots, the Prime Minister leapt to his defence.

“I don’t think he is a person who encourages prejudice in the Australian community, not for one moment,” he said. “But he is a person who articulates what a lot of people think.”

He’s dead right there. Many do. And John Howard will go down in history as the political operator who chose not to combat this dark side of our psyche but to exploit it.

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His neighbour Sonter Neil was home on Tuesday night and saw what he believes were the Labor operatives accosting the leafleteers. “I just thought it was someone having a blue from the club. Then they started rousing on each other and screaming.”

Karen Chijoff, the Liberal candidate for Lindsay, remained out of sight yesterday, even as her office insisted she was out “talking to voters”.

Ed Husic, a Labor candidate for the seat of Greenway in the 2004 election who was the subject of a racist letterboxing campaign, said the revelations prove race-baiting is an established Coalition technique.

Mr Husic, a Muslim who lost to the Liberals’ Louise Markus by about 800 votes, said the only difference between the 2004 and 2007 incidents is that this time the perpetrators have been caught.

On the Friday night before the 2004 election, anonymous campaigners plastered Greenway with a leaflet that read: “Ed Husic is a devout Muslim. Ed is working hard to get a better deal for Islam in Greenway.” The leaflet carried a picture of Mr Husic, the ALP logo and its campaign slogan, making it appear genuine.

Mr Husic said the issue in Greenway then and Lindsay now was not so much who produced the propaganda but who benefited from it.

A former Liberal Party campaign worker yesterday said the retiring member for Lindsay, Jackie Kelly, had used such dirty tactics before.

Ken Higgs, a booth captain in Lindsay in 2001, said Ms Kelly and her crew printed fake how-to-vote cards in 2001 to capture the preferences of a local action group that was trying to save a former defence site at St Marys.

“It was actually a fake how-to-vote card … intended to deceive voters into voting for Jackie Kelly instead of the Save the ADI site candidate.”

Earlier this year Ms Kelly was caught using electorate office resources to support a business distributing clothing bearing the Australian flag.

In Bennelong and Parramatta, candidates have been targeted by Right to Life Australia with a leaflet accusing them of being pro-abortion and supporting “destructive research on human embryos”.

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Mr Egan issued a statement denying involvement in the pamphlet campaign yesterday: “I have been falsely accused of distributing unauthorised material,” his statement read. “I categorically deny distributing any material that was not authorised in accordance with the Electoral Act. I intend to clear my name.”

Mr Egan, who was photographed handing out the pamphlet by Labor members, declined to comment further.

The Liberals’ state director, Graham Jaeschke, said the party did not authorise the pamphlet and has referred the matter to the Australian Electoral Commission.

Mr Jaeschke said he had expelled Mr Egan and another party member using the special powers of the director after discussions with the NSW party president, Geoff Selig, the Prime Minister’s chief of staff, Tony Nutt, and federal Liberal Party director, Brian Loughnane. Mr Jaeschke is understood to have spoken to Mr Egan before dumping him about 9am on Wednesday.

“There’s no place in the Liberal Party for people who have been involved in this sort of [activity]. We continue to say this flyer was offensive …,” Mr Jaeschke said.

The expulsion of Mr Egan, a member of the party’s state executive and a former adviser to Senator Helen Coonan, was welcomed by some party moderates, who have been battling the right faction over control in NSW. One moderate said: “This is a great scalp for us.”

Another said: “It’s disgraceful seeing the Liberal Party having their agenda being led by an extreme wing of it.”

But some moderates expressed fears that Mr Egan would be reinstated after the election. The dumped candidate in Cook, Michael Towke, was prevented from standing under pressure from Mr Jaeschke and the Prime Minster, John Howard, but has been allowed to stay in the party despite branch stacking allegations and claims he was untruthful in his resumé.

Mr Jaeschke said Mr Egan could not be allowed back into the party by a vote of the state executive, which is controlled by the right, and would have to appeal to a disputes panel.

Mr Egan’s lawyer, Clive Evatt, QC, said Mr Egan had not distributed the pamphlet he was not in the photos.

Mr Egan was a deputy mayor of Blue Mountains City Council and is a director at a public relations firm, Flagship Communications. He is close to leading figures on the right, such as the upper house MP David Clarke and the candidate for Mitchell, Alex Hawke.

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The fake pamphlet says “we gratefully acknowledge Labor’s support to forgive our Muslim brothers who have been unjustly sentenced to death for the Bali bombings” and calls for more mosques to built.

The New South Wales state Liberal Party has expelled two of its members over the flyer and Labor and the Liberals have both referred it to the electoral commission.

But Ms Kelly says people have failed to see the funny side.

“I think its intent is to be a send-up, but it obviously hasn’t worked,” she said. “Pretty much everyone who’s read it chuckles.”

But Prime Minister John Howard is among those who are less than amused.

“I condemn it, I disassociate myself from it,” he said.

Labor’s candidate in Lindsay David Bradbury says it is offensive because it tries to link Labor to Islamic extremism.

“There are insinuations there that the Labor Party is supporting Islamic groups, which is absolutely false.”

Labor’s Penny Wong told Lateline she wants Mr Howard to come clean.

She says he should “disclose all that he knows and all that the Liberal Party knew about this scandalous affair”.

The President of the Australian Federation of Islamic Councils, Ikebal Patel, says it is disappointing that such tactics have emerged at this stage of the campaign.

“It is very concerning that so far at least from the perspective of race and religion it has been a fairly clean election, and at this late stage for something like this to pop up does not augur well at all for democracy,” he said.

Mr Howard is giving his major speech to the National Press Club in Canberra this afternoon.

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