With the row escalating Umno, led by Abdullah Ahmad Badawi, Malaysia's prime minister, suspended Ahmad's membership on Wednesday and barred him from holding any political posts for three years as punishment for "stoking racial tensions".
Abdullah said Ahmad's comments had "caused much anger and protest", including from members of his governing Barisan Nasional coalition.
The censure came after Chinese-based parties in the coalition threatened to reconsider their membership of the alliance.
On Thursday Malaysia's armed forces chief warned that "stern action must be taken to prevent" racial conflicts.
|Ethnic Malays form the majority of Malaysia's population [Reuters]
But General Abdul Aziz Zainal stressed that the army would not intervene unless government authorities seek their help.
But despite the ban, and being told to apologise by Umno, Ahmad remained defiant, telling reporters: "I will not retract, I made no mistake, I will not apologise."
"I will be staying with Umno, which is my party... Make no mistake, I will make a comeback," he said.
The controversy comes at a time when a loose opposition coalition led by Anwar Ibrahim, the former deputy prime minister, is threatening to unseat the government.
Abdullah is also facing pressure from several top Umno leaders who want him to step down now, instead of 2010 as per his succession plan.
The row has highlighted simmering tensions between majority Muslim Malays and Malaysia's ethnic Chinese and Indian minorities, and raised fears of a split in the coalition of race-based parties which has ruled Malaysia for half a century.
Ethnic Malays dominate politics in Malaysia while ethnic Chinese are prominent in business.
Ahmad's remarks were reportedly made during campaigning in last month's by-election in the northern state of Penang, where he said there was a limit to the patience of the Malays and Muslims.
"Do not push us to the wall, as when we turn back we will be forced to push the Chinese in the interests of our own survival," he said.
"The Chinese should not try to be like the Jews in America - it is not enough they control the economy, now they want political control."
The statement was widely reported in Chinese-language newspapers and posted on the website of the Malaysian Chinese Association, the main Chinese-based party in the ruling coalition.
Koh Tsu Koon, the leader of Gerakan, another Chinese-majority party, said Umno's decision to suspend Ahmad was "a step in the right direction".
"We hope this will serve as deterrent against similar irresponsible and insensitive actions," said Koh, who was chief minister of Penang before losing it to the opposition in the March general elections.