The former immigration minister Phil Woolas was ejected from parliament today after two high court judges ruled that he lied about his Liberal Democrat opponent during the general election, in a judgment that is likely to have profound implications for all future campaigns.

Woolas claimed the ruling – which also triggered a byelection and barred him from standing again for three years – would "chill political speech", but the Lib Dem who challenged his 103 majority welcomed the decision, saying lying should play no part in democratic elections.

Elwyn Watkins claimed that Woolas knowingly misled voters in Oldham East in a desperate bid to stir up religious tensions in the last days of the election by claiming Watkins had "wooed" Islamic extremists. He also claimed Woolas lied about Watkins's intention to live in the constituency.

The specially convened election court upheld those arguments after it saw confidential emails between Woolas's team, which included the line: "If we don't get the white folk angry he [Woolas]'s gone."

In the first such decision for 99 years, Woolas (who is to seek a judicial review of the verdict) automatically loses his seat in the Commons and is barred for three years. The speaker will clarify byelection plans in the Commons on Monday.

Woolas was also suspended by the Labour party; he had been a shadow cabinet member. The deputy leader Harriet Harman said it was "no part of Labour's politics to try to win elections by telling lies" and the party would not support any appeal.

The byelection could prove an incredibly volatile first test of the coalition. There was speculation today about whether Woolas's actions would count against Labour, or whether the party could hold on because of the Liberal Democrat's poll ratings.

The ruling could change the way elections are fought. The former lord chancellor Lord Falconer said: "It is bound to have ramifications, if there's no appeal, for how people conduct elections in the future. It is going to make all the political parties say, 'look, we've got to be very, very careful about that in future'." Sir Alistair Graham, former chairman of the committee on standards in public life, said: "There is a serious warning to all politicians."

The case was brought under Section 106 of the Representation of the People Act (1983) which makes it an offence for anyone to publish "any false statement of fact in relation to the candidate's personal character or conduct" to prevent them being elected "unless he can show that he had reasonable grounds for believing, and did believe, that statement to be true".

The court ruled that Woolas's claim, in mocked-up newspapers, that Watkins had "wooed" Islamic extremists and failed to condemn radical groups attacks, was deliberately and knowingly misleading. Woolas was also ordered to pay all costs.

Watkins said: "If you know you have lied about your opponent, then simply you have no part to play in democracy."

Woolas's solicitor Gerald Shamash, who regularly acts for the Labour party, said: "In reaching this decision the court adopted an interpretation of conduct detailed in a case nearly 100 years ago when considering a 19th-century statute. Those who stand for election must be prepared to have their political conduct and motives subjected to searching scrutiny and inquiry ... This decision will inevitably chill political speech."

The Conservative party co-chairman, Lady Warsi, wrote to Harman last night asking to know what role, if any, Labour HQ played in producing and approving Woolas's election literature, and whether any individuals there were aware of its contents or signed it off for use.

Labour leader Ed Miliband told Channel 4 News: "The court has made a very clear judgment in this case, a clear finding of fact about what happened and what Phil Woolas did, in that he knowingly made false allegations about his opponent.

"Therefore, I think we have taken the right decision, and the right decision is to suspend him from the party and to say we are not going to fund his further legal action. I think reasonable people will think we have done the right thing. I think that most MPs – the vast, vast majority of people – fight very clean fights, and I think most people would agree that that is the case.

"There is obviously rough and tumble in politics, but sometimes you go beyond rough and tumble. I think this is a salutary reminder to all politicians across the political spectrum about the importance of a clean fight. It's certainly a reminder that I think all of us will take to heart."