Kyle Pedley, who was deputy chair in Stourbridge, said he resigned after a Muslim candidate for a Dudley council seat was bombarded with questions about his race and religion during a selection interview.
Mr Pedley was then included as an independent candidate for Stourbridge in the general election but has now withdrawn.
Former MP Margot James described the allegations as "extremely serious and shocking", while Baroness Warsi – who has called for a full scale inquiry into Islamophobia in the party – said she was "shocked" but "not surprised".
Mr Pedley outlined the reasons behind his resignation in an interview with the BBC.
He said there had been a "series of issues" with the association that he "could not align with his own personal convictions".
"In my first meeting as an officer, a selection meeting, we interviewed a candidate, he put forward a very compelling case, he spoke about his conservative principles, his background, his experience in the ward he was going for as a council candidate," he said.
"As soon as his two minute pitch ended, he was faced with a barrage of questioning which was factored around one thing and one thing alone, and that was his religion and his race.
"It was 'are you really a Muslim? do you pray five times a day? How many times do you go to the Mosque? How many Muslims do you think there are in the world?'.
"I just sat there aghast."
Mr Pedley said the comments could have been down to "ignorance", but added that even if that was the case it would not make it "any more acceptable".
The chairman of the Conservative Association in Stourbridge said he was "mystified" at Mr Pedley’s resignation, adding that he does not recall the details of the selection meeting in question.
Ms James, who stood down last month after falling out with the association over her Brexit stance, told the E&S: "These allegations are clearly extremely serious and shocking."
Mr Pedley was due to be a Tory candidate for Amblecote at next year's Dudley Council elections but it now expected to stand as an independent.
Baroness Warsi, the former Tory co-chair, said: "This is really a reflection of the kind of things that I’ve been hearing now over four years, happening in associations up and down the country."
A Conservative Party spokesperson, said: "The Conservative Party will never stand by when it comes to prejudice and discrimination of any kind.
"Serious allegations such as these are always investigated thoroughly, which is testament to the seriousness with which we take such issues.
"Our complaints process is rightly a confidential one and there are a wide range of sanctions including suspension and expulsion which are applied on a case-by-case basis."
In an interview with the E&S this week Boris Johnson vowed to stamp out prejudice in his party, but has refused to sanction an inquiry into Islamophobia.