The Times has reported that Lord Ahmed, a Labour life peer, claimed that he received his prison sentenced because of pressure on the courts from Jews “who own newspapers and TV channels".
Lord Ahmed, who in 1998 became the first Muslim life peer, is said to have claimed that the conspiracy was a result of his support for the Palestinians in Gaza.
He is said to have made the comments in a TV interview in April last year while on a visit to Pakistan.
Labour today suspended the peer "pending an investigation".
Ed Miliband, the Labour leader said: "I think that the comments reported by Lord Ahmed are disgraceful comments.
"There's no place for anti-semitism in the Labour Party, and frankly anybody who makes those kinds of comments cannot be either a Labour lord or a Labour member of Parliament."
Lord Ahmed, who was born in Pakistan, became Baron Ahmed of Rotherham at the age of 40.
In 2007 he was highly critical of the awarding of a knighthood to Salman Rushdie, claiming the author had "blood on his hands."
In 2009 he was jailed for dangerous driving after sending and receiving text messages minutes before being involved in a fatal motorway crash. The Court of Appeal later suspended his 12-week jail sentence.
He was freed after serving 16 days in jail after Martyn Gombar, a 28-year-old Slovakian was killed on Christmas Day in 2007 after his stationary car was hit by Lord Ahmed’s Jaguar.
In the TV broadcast it is alleged Lord Ahmed said of his jail sentence: “My case became more critical because I went to Gaza to support Palestinians. My Jewish friends who own newspapers and TV channels opposed this.”
A criminal law expert told the Times that if Lord Ahmed had made the claims in the UK, he could have faced prosecution for a hate crime.
A spokesman for the Labour Party said they will be “seeking to clarify” the remarks.
"The Labour Party deplores and does not tolerate any sort of racism or anti-Semitism...we are suspending Lord Ahmed pending an investigation."
Lord Ahmed is said to have told The Times he had “no recollection” of the interview.
“I’ve done a lot of interviews,” he reportedly said. “If you’re saying that you have seen this footage then it may be so but I need to see the footage and I need to consult with my solicitors before I make any comments in relation to this.”
Robert Halfon, the Conservative MP for Harlow, said: “These are serious allegations. I’m glad the Labour Party are doing an investigation to see if they are true or not. This kind of language, if he used it, is not to be tolerated.”
Last year Lord Ahmed was suspended from the Labour Party amid reports that he offered a £10 million bounty for the capture of President Barack Obama and his predecessor President George W Bush.
The peer denied having made the comments, published in a Pakistani newspaper, and was reinstated after an investigation by Labour Lords Chief Whip Lord Bassam.