Mr Ali had apologised after he was recorded suggesting in a meeting of the Lancashire Labour Party that Israel allowed the October 7 Hamas assault and used it as a pretext to invade Gaza.
A party spokesperson said: “Following new information about further comments made by Azhar Ali coming to light today, the Labour Party has withdrawn its support for Azhar Ali as our candidate in the Rochdale by-election.
“Keir Starmer has changed Labour so that it is unrecognisable from the party of 2019.
“We understand that these are highly unusual circumstances, but it is vital that any candidate put forward by Labour fully represents its aims and values. Given that nominations have now closed, Azhar Ali cannot be replaced as the candidate.”
It comes after the Labour leader faced a backlash on two different fronts, from the left wing of his party and some Conservatives, after standing by Mr Ali.
The row intensified as Sir Keir was urged to re-admit other MPs suspended in antisemitism rows, with some questioning the alleged difference in his approach to left-wing MPs and those seen as Starmer loyalists.
Labour peer Prem Sikka told The Independent that Sir Keir’s backing for Mr Ali shows that there is “one set of rules for anybody on the left, and another for favourites of the Labour leader”.
Tory MPs also rounded on Sir Keir, saying his backing for Mr Ali showed Labour “has not changed” since Jeremy Corbyn’s leadership, when the party was dogged by its handling of antisemitism complaints.
Labour, meanwhile, publicly stood by their candidate, with shadow minister Nick Thomas-Symonds insisting it would be “unfair” to conclude there is a problem with Labour in Rochdale, adding that Mr Ali had simply “fallen for an online conspiracy theory”.
One shadow minister told The Independent Sir Keir needed to be clear that Mr Ali, if elected, “will not be a Labour MP… and that we will replace him with an appropriate candidate for the general election”.
“It is a mess… and a completely avoidable one,” they said.
Former justice secretary Sir Robert Buckland told The Independent: “Once again, Labour is showing that they have not changed, and are not to be trusted and are nowhere near ready for government.”
Kate Osamor was suspended last month over a Holocaust Memorial Day post suggesting the Israeli action in Gaza is genocide. Diane Abbott was suspended after writing a letter suggesting Jewish people are not subjected to the same racism as some other minorities.
A spokesperson for Campaign Against Antisemitism said: “Sir Keir Starmer has blotted an otherwise fairly admirable copybook and given the public reason to doubt the earnestness of his promise to tear antisemitism out ‘by its roots’ in Labour.
“People will have to judge for themselves whether the additional reported comments by Azhar Ali are really any worse than the comments that had already been reported.
“Rather than appearing as a principled decision, Labour’s withdrawal of support for its candidate at this late stage just looks as expedient as the failed attempt to defend him. It is the worst of all worlds for Labour.”