Leader Chris Hipkins announced Kerrin Leoni's departure from the Labour line-up on Friday after video emerged of her trying to enrol gang members and pitching for support.
"Campaigning alongside gangs is unacceptable," Mr Hipkins said.
"Candidates are responsible for their own choices and when they fall short of the standard I expect, I will hold them to account."
Gang associations are political poison for Labour, which is susceptible to the charge it is soft on crime given rising gang-related violence during its last term.
The issue has roared back to relevance over the last week of campaigning for the November 7 election, after Greens and Maori Party MPs attended a Mongrel Mob gathering.
The two parties are Labour's likely coalition partners on the left, and it has allowed the National party to lay the boot in.
"Labour funds gangs, National fights gangs. You make the choice on who you want to vote for," Mr Luxon said in a social media post titled "Don't go back to Labour's lawlessness".
Analysts have suggested a four-point bump in National's latest poll may be a result of the gang issue hitting the headlines.
Mr Hipkins admitted the renewed gang focus was "not helpful" to Labour's campaign, but denied it would be election-turning in a close race.
Ms Leoni is a charity founder and former Auckland councillor who has gang members in her close family.
In an emotional press conference at the Hawke's Bay A&P show, Mr Hipkins decried the politics underpinning the release of the video.
"There is an element of racism in all of this as well which is just ugly and our Maori MPs are held to a very different standard," he said.
"We have to recognise the very human nature of this situation ... all of us navigate family situations in politics, and it's bloody hard.
"She should be really proud of what she has been able to achieve, growing up in an environment where she's been surrounded by gang members.
"She has made a mistake here and paid a high price."
Mr Luxon, who was also at the A&P, said the saga showed a difference in values and achievement.
"You can't trust Hipkins or Labour on law and order ... the Mongrel Mob clearly want them elected," he said.
"Look at our record in government, look at what's happened with law and order, do New Zealanders feel safer in their businesses, homes and community with us? Absolutely."
Gangs are an established part of New Zealand society, particularly among Maori and Pasifika, fuelled in membership by deportations from Australia.
Past governments led by John Key and Jacinda Ardern have attempted to engage with gangs or fund targeted programs to bring down crime and meth rates.
In recent years, National under Mr Luxon has adopted a zero tolerance approach, successfully campaigning on a crackdown on gang patches and tougher sentences at the 2023 election.
Gang membership, however, has continued to grow and for the first time, outnumbers police officers.
Ms Leoni was Labour's candidate in the Tamaki Makaurau seat, the Maori electorate covering much of Auckland, with polls showing she was in a tight race with Maori Party MP Oriini Kaipara.
With voting underway already, her name will appear on the ballot but Mr Hipkins said she would not campaign and Labour wouldn't accept her as an MP.
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