Theresa May accused Labour of "betraying" Britain's Jewish community by failing to expel Ken Livingstone from the party.
The Prime Minister said the party's disciplinary panel let the former London mayor "off the hook" following accusations of anti-Semitism as she launched a stinging attack on Jeremy Corbyn's leadership in a campaign speech.
Mrs May referred to the ongoing row when she launched the Conservative campaign for the May local elections in Nottinghamshire.
She claimed the decision to allow Mr Livingstone to remain a party member showed the extent to which the opposition had moved away from the centre ground of British politics.
The PM compared her party with "a Labour Party totally out of touch with the concerns of the British people, which ignores the priorities of local communities and instead indulges its own ideological obsessions".
She said: "A Labour Party which just this week revealed the depths to which it has now sunk, betraying the Jewish community in our country by letting Ken Livingstone off the hook.
"It could not be clearer that the Labour Party is now a long way away from the common, centre ground of British politics today."
Mr Corbyn has called Mr Livingstone's comments "grossly insensitive" and said it is "deeply disappointing" he has not apologised.
His deputy, Tom Watson, also said it is "incomprehensible" that members of the disciplinary panel had not expelled the 71-year-old from the party.
Mr Livingstone has vowed to campaign against his suspension, insisting he had told the historical truth, and would now consult lawyers on his legal position.