A newspaper in Pakistan quoted Lord Ahmed offering cash for the capture of the US president and his White House predecessor George Bush at a reception in Haripur on Friday.
The Express Tribune said he spoke out in direct response to a US reward being offered for the capture of a prominent Pakistani radical.
Labour moved swiftly to suspend the peer, pending an investigation.
“If these comments are accurate we utterly condemn these remarks, which are totally unacceptable,” a spokeswoman said. “The international community is rightly doing all in its power to seek justice for the victims of the Mumbai bombings and halt terrorism.”
But Ahmed complained that party chiefs had not spoken to him before announcing the move and challenged the party to produce evidence against him.
However, speaking from Pakistan, Ahmed admitted he had told the meeting that Bush and former Labour prime minister Tony Blair should be prosecuted for war crimes.
“They have suspended me? That’s a surprise to me. I did not know,” he said.
“If the Labour party want to suspend me I will deal with the Labour party. They will have to give me some evidence.”
Asked about the reported comments, he said: “I never said those words. I did not offer a bounty. I said that there have been war crimes committed in Iraq and Afghanistan and those people who have got strong allegations against them – George W Bush and Tony Blair – have been involved in illegal wars and should be brought to justice.
“I do not think there’s anything wrong with that,” he said, adding that he was equally concerned that anyone suspected of terrorism should face justice as well.
The newspaper said the peer called the US bounty on Saeed “an insult to all Muslims”.
“If the US can announce a reward of $10m for the captor of Hafiz Saeed, I can announce a bounty of £10m on President Obama and his predecessor George Bush,” it quoted him as saying.
Lord Ahmed added that he would sell his house to fund it if necessary, the paper said.
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