Shadow immigration minister Phil Woolas has vowed to fight on after his 2010 election win was declared void and he was suspended by the Labour party.
Mr Woolas faces a three-year parliamentary ban after being found guilty of deliberately making false statements about a Lib Dem rival in campaign literature.
A by-election must be fought in Oldham East and Saddleworth, pending appeal.
Mr Woolas won the seat by 103 votes over Lib Dem rival Elwyn Watkins.
But his opponent argued the false allegations probably swayed the vote in such a close contest.
Mr Woolas, who served as a Home Office immigration minister in the last Labour Government, is to apply for a judicial review of the decision, handed down by two High Court judges.
Through his solicitor he issued a statement saying the judgement would "chill political speech".
A specially-convened election court - the first of its kind for 99 years - was set up in Saddleworth in September to hear the charges against Mr Woolas.
He was accused of stirring up racial tensions in his campaign leaflets by suggesting Mr Watkins had pandered to Muslim militants, and had refused to condemn death threats Mr Woolas said he had received from such groups.
Mr Woolas ran a "risky" campaign, the court was told, designed to "galvanise the white Sun vote" because he feared he faced defeat on poling day.
The former minister was also accused of making a false statement that Mr Watkins had reneged on a promise to live within the constituency prior to the election.
Declaring the May poll result void, Mr Justice Nigel Teare and Mr Justice Griffith Williams said Mr Woolas knew all three statements were untrue, and was therefore guilty of illegal practices under election law.
They said: "In our judgment to say that a person has sought the electoral support of persons who advocate extreme violence, in particular to his personal opponent, clearly attacks his personal character or conduct.
"It suggests that he is willing to condone threats of violence in pursuit of personal advantage.
"Having considered the evidence which was adduced in court we are sure that these statements were untrue. We are also sure that the respondent had no reasonable grounds for believing them to be true and did not believe them to be true."
Mr Woolas was ordered to pay £5,000 and costs to Mr Watkins.
In a statement, he said the judgement "raised fundamental issues about the freedom to question politicians".
He added: "Those who stand for election can participate in the democratic process must be prepared to have their political conduct and motives subjected to searching, scrutiny and inquiry.
"They must accept that their political character and conduct will be attacked.
"It is vital to our democracy that those who make statements about the political character and conduct of election candidates are not deterred from speaking freely for fear that they may be found in breach of election laws."
Announcing Mr Woolas's suspension from the party, Labour deputy leader Harriet Harman said: "It is not part of Labour politics to try to win elections by saying things that are not true."
Simon Hughes, deputy leader of the Liberal Democrats, said the decision was "a significant moment in British legal and political history".
He said: "Mr Woolas has come severely unstuck and I am very pleased for politics and the rule of law that the judges have said so clearly that this was unacceptable."
Conservative Party chairman Baroness Warsi accused Labour leader Ed Miliband of a "terrible misjudgement" in appointing Mr Woolas as shadow immigration minister.
She said: "He was fully aware of Phil Woolas's despicable and inflammatory campaign but still appointed him to a highly sensitive role on his front bench."
The Commons Speaker John Bercow must decide whether to initiate a by-election for Oldham East and Saddleworth immediately, or wait for further legal proceedings.
He will make a statement to the Commons on Monday.
The case against Mr Woolas was brought under Section 106 of the Representation of the People Act.
This makes it an offence to publish "any false statement of fact in relation to the candidate's personal character or conduct" to prevent them being elected - unless they believed it was true and had "reasonable grounds" to do so.