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The extraordinary attack began at a meeting to discuss the two newspaper groups jointly owned West Ferry Printers. Desmond began the meeting by greeting Jeremy Deedes, the Telegraph chief executive, with "Guten morgen", the German for good morning.

Desmond is then reported to have asked the Telegraph Group directors, who also included managing director Hugo Drayton and and finance director Niamh O'Donnell-Keenan, about being "owned by Nazis". He also made comments and references to Lord Black, and was reported to have called Telegraph directors "fucking c**ts" and "fucking wankers".

Witnesses have also claimed that Desmond strutted up and down the room, holding his fingers to his lips, impersonating Basil Fawlty's famous goose-stepping scene in TV comedy 'Fawlty Towers'.

According to Drayton: "I think it was an organised joke that went too far. That went beyond the boundary. Meetings with him do have that kind of language, which can be colourful. He can be charming and amusing, but at other times he can also be vicious and inappropriate," Drayton said.

When asked to calm down by Deedes, Desmond asked the Telegraph chief to "come outside and sort it out".

"They were making clear the point that they knew one of the bidders was Axel Springer. There were one or two light-hearted exchanges, which I ignored. But then he said, 'are you looking forward to being owned by Nazis?'. I said it was totally inappropriate," Deedes said.

Desmond also called the Hollinger executives "crooks" and referred to Deedes as a "miserable little piece of shit".

Deedes described the mix of racism and slander to The Guardian as grotesque and said if Desmond had been in a public place he would have been arrested.

It is believed that the Telegraph will refuse to reconvene the meeting unless there are third parties present. They were unavailable for comment last night.

The outburst is likely to come as a shock to the Conservative Party, which Desmond's paper, the Daily Express, has just pledged to support. Last night however, it said that the outburst was a "private disagreement, which has nothing to do with us". With the story plastered over the front pages of newspapers this morning, Smith Square might be taking a different view today.

Frankfurt-based Commerzbank, which funded Desmond's acquisition of the Express titles, will be similarly shocked at the Nazi abuse, as will Axel Springer, which is leading the race to buy the Daily Telegraph and has recognition of Israel as a company principle.

As the Telegraph party stormed out, Desmond instructed his senior Express executives, including managing director Martin Ellice, finance director Rob Sanderson and publishing director Chris Haslum, to sing the German national anthem 'Deutschland uber Alles'. They were also alleged to have made Nazi-style "sieg heil" salutes as they left the meeting.

Desmond recently pulled out of the race for ownership of The Telegraph because he was not prepared to increase his bid. During his pursuit of the Telegraph Group, Desmond sold off his adult magazine business for around £20m to Remnant Media in a move that was widely interpreted as an effort to boost his respectability in the battle for ownership, something that now could be in jeopardy.

A spokesman for Desmond did not deny the incident had taken place and refused to answer whether Desmond was fit to be running a national newspaper, following his outburst.

Commenting on the initial report, Desmond's spokesman told Brand Republic: "I just read a very interesting interpretation of what was a very productive one-and-a-half-hour meeting."

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