The former immigration minister's General Election win, by 103 votes, has been declared void.
Candidate Elwyn Watkins launched the legal challenge, using a rarely-used election law, in response to a pamphlets produced by the Labour team.
Mr Woolas won the seat by just 103 votes.
The specially convened election court, chaired by two High Court judges, heard he sought to "make the white folk angry" by suggesting there was a Muslim campaign to kick him out.
Mr Woolas denied the claim and argued he was right to say Mr Watkins was in a "pact with the devil" because he failed to condemn the alleged campaign.
Former Lord Chancellor Charlie Falconer told Sky News Mr Woolas had not been convicted of a criminal offence as it was an election court.
"Inevitably the consequences of there being a successful challenge in an electoral court for the first time in 100 years on the basis of fraud is bound to have ramifications right through the system," he said.
During the hearings, Mr Watkins' QC Helen Mountfield, said: "Mr Woolas' team had made an overt and, some may say, shocking decision to set out to 'make the white folk angry' by depicting an alleged campaign by those who they described generically as Asians to 'take Phil out' and then present Mr Watkins as in league with them.
She accused Mr Woolas of making "false statements as part of a series of reckless and irresponsible steps in this campaign - using doctored photographs, misrepresenting facts, stooping even to fomenting racial divisions and tensions".
Sky News
The election has to be re run, Woolas is patently not fit to hold public office. The rotting stench of the last Labour administration still hangs in the air.
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