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The prime minister believed Lee Anderson's comments about Sadiq Khan were unacceptable because they conflated "all Muslims with Islamist extremism", Downing Street has said.
The former Tory deputy chairman was suspended from the party after refusing to apologise for saying "Islamists" had "got control" of the London mayor.
The PM's official spokesman said the language he used was "wrong".
But he added that Rishi Sunak did not believe Mr Anderson was racist.
"It's unacceptable obviously to conflate all Muslims with Islamist extremism or the extreme ideology of Islamism," he said.
"That's why the PM regarded those comments as wrong and unacceptable."
During a discussion on GB News on Friday, Mr Anderson said: "I don't actually believe that the Islamists have got control of our country, but what I do believe is they've got control of Khan and they've got control of London, and they've got control of Starmer as well."
The MP for Ashfield was suspended from the parliamentary party on Saturday after refusing to apologise, and now sits as an independent.
On Monday, Mr Sunak said Mr Anderson was suspended because his comments were "wrong" and not acceptable.
However, he has avoided calling them Islamophobic, prompting Labour to accuse the PM of being too "weak" to do so.
Foreign Secretary James Cleverly joined calls for Mr Anderson to apologise on Monday, saying his comments were not "accurate" or "fair".
However, Mr Anderson has also received support from some Conservative MPs, including Jacob Rees-Mogg.
The former minister said his comments were "infelicitous" but "his concerns about Islamism are entirely legitimate" and he should not have been suspended from the party.
Former Home Secretary Suella Braverman is also said to think his suspension is an overreaction.
Mr Anderson has acknowledged his words "may have been clumsy" but said apologising "would be a sign of weakness" as he believes he is right.
In an interview on Monday with GB News - who employ him as a broadcaster - he argued pro-Palestinian protests outside Parliament and threats to MPs showed Mr Khan had "lost control of the city".
Pressed over whether he would join the right-wing Reform UK party, the former Labour councillor declined to comment but said he had "been on a political journey".
'No-go areas'
Speaking to BBC Radio London on Monday he had called Mr Anderson's comments "inflammatory" and urged him to apologise.
However, the former minister also said he could see what he was "trying to drive at", going on to say parts of Tower Hamlets in London and Sparkhill in Birmingham were "no-go areas".
His remarks were criticised by figures including the Conservative mayor of the West Midlands, Andy Street, who called them "nonsense slurs".
In another interview with the station on Tuesday Mr Scully said he "put his hands up" for using language he "regrets".
"What I was trying to say, I thought I was being specific about but clearly not, is the fact that a lot of the conversation, and the vacuum that's allowed to then be filled by populists, is when prejudice builds up because of perception," he said.
"There are areas of this country where there are tiny, tiny groups of people that cause people to feel uncomfortable in particular areas.
"That might be a white gang, that might be a black gang, a Muslim gang, whatever, and that then tends to write off whole communities for some people."
The Sutton and Cheam MP described this line of thinking as "totally inappropriate".