Afzal Amin was filmed allegedly telling members of the protest group that they should organise a march against the planned multi-million pound new Dudley Mosque, then for it to be called off so he could take the credit, the Mail on Sunday has reported.
The newspaper said the plan was that in return for the EDL's co-operation, he said he would be their 'unshakeable ally' and bring their views into the mainstream if he won election to Parliament.
An emergency meeting of the Tory party's candidates committee has already taken place and a full hearing will take place on Tuesday when Mr Amin will be invited to give his side of the story.
The committee will then decide whether or not he can stay on as the candidate.
The Dudley North seat is the most marginal in the Black Country. It is held by Labour's Ian Austin with a majority of just 649 votes. Opinion polls have suggested UKIP is the main opposition.
Mr Amin served as a captain in the army. He was with the 20th Armoured Brigade in Iraq and has also done three tours of duty in Afghanistan.
He grew up in the Black Country, attending schools in Smethwick and Oldbury before going to Sandwell College.
If Mr Amin is dropped as a candidate it will leave the Tories facing a race against time to replace him.
Councils have to have received applications by April 9.
A Conservative party spokesman said: "Following an emergency meeting, it has been decided unanimously to suspend him as a candidate with immediate effect. The Conservative Party views this this as a matter of extremely serious concern."
While the meetings were intended to be private and discreet, I made sure I involved Chief Superintendent Chris Johnson from the start and I made clear, which is evident in the recordings, that I refused to do anything illegal.
During a time of heated tensions between various communities in our country, it's vital that we tackle these problems and take difficult, sometimes uncomfortable, steps. The potential for inter communal violence has become a real threat to the destabilisation of our country and we must prevent this at all costs.
It's in this context that, for the past year, I was conducting discussion with Tommy Robinson who remains the leader of the EDL, to prevent further inter communal tensions and violence. Robinson presented himself in tears regarding his mother's illness and the plight of his children and I opened up to him recognising that no man should be beyond redemption. At the second meeting it was Robinson who proposed the idea of staging a march at our third meeting, this was a surprise to me and after some discussion I saw some merit in the potential to build bridges through negotiation and so I agreed it was worth discussing further. I recognised this as an opportunity to promote better community cohesion between various communities, particularly in Dudley because it would lead to face to face discussions between communities and an increase in awareness of the other. It would serve as a confidence building measure.
Politics requires an amount of bravery and using my experience as a strategist in Afghanistan, negotiating between pro-Taliban militias and the US military, I decided to use the same tactics to improve community relations here in my own country between the EDL and Muslim communities. While the discussions were sensitive, I informed Chief Superintendent Johnson, who was supportive of my plans of resolving very violent tensions through face to face dialogue, and he was aware of subsequent meetings between the EDL and members of the Dudley Muslim community.
The final two meetings were recorded and are a gross misrepresentation of the reality. This does not surprise me that some journalists can manipulate vulnerable unemployed people in this way. Robinson has been pursuing me for financial support since June 2014, I have not given him or any of his associates any money or any other support. I emphatically said we could not pay anyone and that it would illegal to do so. He pushed the issue but I still did not agree to and over any money.
The people who support EDL are a very angry group of disenfranchised British people who are excluded from almost every aspect of our society. However, what they are campaigning against, almost all Muslims agree upon: extremism, terrorism, sexual abuse of children or ghettoisation of communities. However, within all of this, what's missing is any real contact between the EDL and Muslim communities. I believe a progressive dialogue between both communities is the way forward. And I had hoped as the MP of such diverse and divided community I could voice the concerns of people locally and nationally.
Prime Minister David Cameron is understood to have been informed of the situation and approves of the way it is being handled.
Mr Amin was reportedly filmed by former EDL leader Tommy Robinson, who blew the whistle on the plot because he objected to being used as a pawn.
The candidate, said to have been described on his Tory Party website as a former Army education officer to Princes William and Harry, outlined his plan to Mr Robinson and current EDL chairman Steve Eddowes at an Indian restaurant in Birmingham on Monday.
The 40-year-old allegedly suggested EDL members could be paid to canvass on his behalf, and floated the idea of a phoney protest - just weeks after a real demonstration in Dudley by 600 EDL supporters led to 30 arrests.
'This is my fantasy," he apparently says in the footage. "If I could demonstrate to the people in Dudley that I can be a positive voice for community cohesion, for development, for campaigning against the evils and the terrorism and the child grooming and all the rest of it, then that would help me a lot in the forthcoming Election.
'One way of doing that is, if you were to announce a second march about the mosque ... and then we have two meetings with the chief of police, members of the Muslim community, we all play our roles, you say 'Yeah we're going to do a march, we're campaigning and so on'.
"We have a second meeting where things are a bit calmer then at the third one, we have a press conference where we say, 'We were going to do a march. The chief police asked Afzal Amin, members of the Muslim community, we've sat together and ... we're going to work closely together".'
Mr Amin reportedly expanded on his plot in a phone call on Wednesday and in a second meeting at a branch of Pizza Express in London on Thursday.
Paying people to canvass in elections is an offence under the Representation of the People Act 1983.
But Mr Amin is said to have told the men: 'I'll put it to you bluntly. I need two white working class lads to go round those areas to say to people, 'You support the Army, if you support the troops then vote for this guy'. That's what I need."
When Mr Robinson suggested that would cost £500 a week, MrAmin is said to have replied: 'What's that, £250 each a week? They do April 4 to the first week of May, that'll be loads ... from our perspective, they're volunteers."
Mr Amin had been due to take on sitting Labour MP Ian Austin in the election on May 7. Mr Austin had a majority of 649 in Dudley North in 2010.
Labour frontbencher Jonathan Ashworth said: "Decent people in politics share the wide consensus that the EDL are quite simply despicable. These allegations regarding such a senior Conservative Party figure in Afzal Amin are quite simply jaw dropping.
"Given these allegations the Tory Party should take immediate steps to suspend Mr Amin from membership.
"What's more the Tory Party must also investigate who else might have been involved.
"The Tory campaign is tonight mired in deeply damaging allegations, such as those against Mr Amin and the ongoing controversy surrounding Tory Chairman Grant Shapps.
"As the Tories turn in on themselves, beset by problems of their own making, only Labour has a better plan for a better future."
Mr Austin said: "This is a shocking story. A really appalling turn of events, but it doesn't matter who the Tory candidate is because it's the Conservative Government's policies that mean 400 staff at Russells Hall Hospital are facing redundancy."
Around 600 members of the EDL descended on Dudley in February to protest against long-running plans for a new mosque.
The march was condemned by politicians from across the political divide as it resulted in traders closing and losing a day's takings, amid fears of a repeat of violence seen at other protests.