Christine Shawcroft said she was “wrong and misguided” to have sent an email calling for a council candidate in Peterborough to have his suspension lifted as she had not been aware of all the information in the case.
Labour sources said the controversy centred on Alan Bull, who was suspended from the party last week.
Mr Bull has been accused of being responsible for anti-Semitic posts on social media, but he said they were “doctored screenshots”, according to reports.
Ms Shawcroft said she was sorry to have sent an email calling for the suspension to be lifted.
She said: “I sent this email before being aware of the full information about this case and I had not been shown the image of his abhorrent Facebook post. Had I seen this image, I would not have requested that the decision to suspend him be re-considered. I am deeply sorry for having done so.
“This week we have seen a clear expression of the pain and hurt that has been caused to Jewish members of our party and the wider Jewish community by anti-Semitic abuse and language, and by the reality of anti-Semitism being denied and downplayed by others. In light of this, I have decided to stand down as Chair of the Disputes Panel to ensure my wrong and misguided questions on this case do not cause doubt or anxiety about our processes.
“We must eliminate anti-Semitism from our party and wider society. To do this we must make sure our processes are as robust as possible and have the faith and confidence of our members.”
Luton South MP Gavin Shuker wrote on Twitter: “If this is true, Christine Shawcroft doesn’t just need to step down from chairing the disputes panel, she needs referring to it.”
Jennifer Gerber, director of the Labour Friends of Israel, said: “Christine Shawcroft should be suspended from the Labour Party and kicked off the NEC.”
The resignation came as Jeremy Corbyn has pledged to deal with 70 outstanding cases involving claims of anti-Semitism within Labour ranks as soon as possible.
Mr Corbyn insisted the party was taking action on anti-Semitism, telling the Jewish News: “Of the Labour Party cases, some of which I inherited on becoming leader, there’s been 300 references since 2015, 60 are still under investigation, 24 have gone to the National Constitutional Committee, 24, roughly, went to a final warning, and 150 were either expelled or resigned.
“That represents 0.02 per cent of the party membership.
“There are other cases pending. I’ve said to our newly-appointed general secretary that her first priority has to be the full implementation of the Chakrabarti Report and there has to be an appointment of an in-house lawyer, a legal team, to ensure that there is a proper approach to all of these cases and of the – I understand –70 cases due to be dealt with. They must be dealt with as quickly as possible.”
Asked about calls for David Lammy to be deselected as an MP because he attended a rally against anti-Semitism in Labour outside Parliament, Mr Corbyn said: “It’s up to the local party, but not for that, no.
“Obviously, the local parties must decide what they want to do in the future. David Lammy is a colleague, a friend of mine, I admire what he stands for and what he does and he should not be condemned for that.”
The comments came as the rift between Mr Corbyn and senior Jewish leaders has deepened after they demanded he disown supporters who had “vilified” anti-Semitism protesters.
In a letter to the Labour leader, the Board of Deputies and the Jewish Leadership Council (JLC) said it was a “disgrace” that people who joined a demonstration against anti-Semitism in the Labour Party had been subjected to “abuse and insults”.
They said Labour members and Labour-supporting blogs driving the abuse were “largely doing so in your name”, undermining his pledge to eliminate anti-Semitism in the party.