Mr Osborn made the anti-Semitic slur public in retaliation against the pro-Baillieu forces after he and another staff member, Simon Morgan, were sacked for contributing to an anonymous anti-Baillieu internet blog.
Ms Chandler resigned, offering an apology to Mr Held and the Jewish community, after party president David Kemp gave her an ultimatum to quit or be sacked.
Mr Baillieu, who was ambushed with the racist email during a radio interview yesterday, sought to limit the damage, saying: “Anti-Semitism is a disgraceful form of vilification and is repugnant to the values of the Liberal Party and to myself.”
But he vowed to continue his campaign to purge the party of traitors and “cancerous elements”, saying other Liberals beyond the two sacked staff members were implicated in the internet blog.
They would be tracked down, exposed and could face expulsion.
“I do not care what it takes, but I want to see the organisation cleaned up,” Mr Baillieu said.
As Jewish community leaders condemned Ms Chandler’s comment, she issued a statement expressing deep regret. “I have many Jewish friends and am in no way anti-Semitic,” she said.
“My comments were completely out of character and were made on the spur of the moment in an email during a difficult period of the election campaign.”
Mr Held last night said he was surprised and deeply disappointed to learn of Ms Chandler’s comment, but had accepted her apology.
Mr Osborn said he had decided to release the email from Ms Chandler, whom he described as “a known factional associate of Mr Baillieu”, because “there is no place in the Liberal Party for that sort of base prejudice”.
He said she was involved in the internal investigation into the anti-Baillieu blog, which was now exposed as “a complete sham”.
He accused Mr Baillieu and outgoing Liberal Party director Julian Sheezel of leaking to The Age selective internal Liberal emails from him and Mr Morgan. “Mr Baillieu and Mr Sheezel have demonstrated at best incompetence and at worst a disingenuous cover-up,” he said.
Mr Osborn and Mr Morgan were sacked last month after the anti-Baillieu website, called “He who stands for nothing”, was traced to their computers at Liberal Party headquarters.
The blog, which has been shut down, had a banner reading “Ted Baillieu must GO” , described the Liberal leader as a “vile communist” and “vacuous moron”, and called him Cottee’s — “because he’s thick and rich”.
Mr Baillieu, Dr Kemp and Mr Sheezel say they have seen evidence linking other senior Liberals to the blog, and have asked incoming state director Tony Nutt to find out who they are.
The Age believes the investigation is homing in on several staff members in federal and state MPs’ offices — although no MP has so far been directly implicated.
Dr Kemp condemned the behaviour of the sacked Liberal bloggers as vicious and damaging to the party. “I have never seen behaviour of this kind before in the party,” he said.
“What we have seen in this case is behaviour that not only carries out a vicious personal vendetta against the leader of the party but does so in a completely deceptive way from a professional position in the party.”
Mr Baillieu said the sacking of the two was the “tip of the iceberg”.
“There are a cell of people who’ve been doing the bidding of others in the party. There are a number of people, they are a small, deep-seated cell, and it’s time to clean up,” he told Fairfax Radio.
He labelled the activities of Mr Morgan and Mr Osborn “outright treachery”.
“We’ve had these individuals seeking to undermine our campaigns and corrupt our election campaigns and candidacies,” Mr Baillieu said. “You can’t have that. These are paid employees.”
Former premier Jeff Kennett, a supporter of Mr Baillieu, condemned Mr Osborn and Mr Morgan for disloyal and cowardly behaviour, saying “those moles have been cut out of the system”.
