The Council on American-Islamic Relations (CAIR) filed the lawsuit on Tuesday against North Carolina lawmaker Cass Ballenger.
The move is in response to a newspaper article in which Ballenger also claimed the stress of living near CAIR in Washington caused the breakup of his marriage.
Ballenger said that proximity to CAIR “bugged the hell” out of his wife. He said she objected to women “wearing hoods” going in and out of CAIR's Capitol Hill headquarters.
He also told the paper that CAIR's office was "two and a half blocks from the Capitol, and they could blow it up".
At the time of the article’s publication, CAIR attributed Ballenger’s statements to “Islamophobic hysteria”.
"(CAIR's office is) two and a half blocks from the Capitol, and they could blow it up"
North Carolina congressman
In its lawsuit, CAIR said Ballenger’s statements harmed the group’s reputation.
The suit said Ballenger’s claim that CAIR raised funds for Hizb Allah was made “with actual malice, wrongful and willful intent to injure… and with reckless disregard for its truth or falsity”.
"CAIR is seeking $2 million in compensatory and punitive damages, together with costs and lawyers' fees.
“With this lawsuit, we are sending a clear message to all those who make malicious and defamatory statements against American Muslims or their institutions that they will be held accountable in a court of law,” said Arsalan Iftikhar, CAIR's director of legal affairs.
Ballenger's spokesman Dan Gurley said his office had yet to receive official notice of the lawsuit.
“With this lawsuit, we are sending a clear message to all those who make malicious and defamatory statements against American Muslims... that they will be held accountable in a court of law”
"We've not been officially served. Until we are, we don't have any comment," he said.
Ballenger, who serves on the House International Relations Committee, is a controversial figure.
He has perviously angered African-American and women's groups with allegedly bigoted statements.
Last December, Ballenger said Congresswoman Cynthia McKinney stirred in him “a little bit of a segregationist feeling. I mean, she was such a bitch”.
In another incident, many people were offended by a black lawn jockey - long a symbol of racial insensitivity - in Ballenger's front yard.