Lib Dem leader Nick Clegg has admitted that he knew of concerns over Lord Rennard's behaviour more than four years ago.
Several women have accused the party's former chief executive of inappropriately touching and propositioning female party workers, which he strenuously denies.
In a statement this evening, Mr Clegg said he did not know about the allegations, but admitted that his office was aware of "indirect and non-specific" concerns about Lord Rennard's conduct in 2008.
In a statement he said: "I am angry and outraged at the suggestion that I would not have acted if these allegations had been put to me. Indeed, when indirect and non-specific concerns about Chris Rennard's conduct reached my office in 2008, we acted to deal with them.
"My chief of staff at the time, Danny Alexander, put these concerns to Chris Rennard and warned him that any such behaviour was wholly unacceptable.
"Chris Rennard categorically denied that he had behaved inappropriately and he continues to do so. He subsequently resigned as chief executive on health grounds."
Earlier, aides had said the Deputy Prime Minister only learned about the specific complaints being made against Lord Rennard following a Channel 4 News report earlier in the week.
The women claim they reported Lord Rennard's alleged behaviour to senior party officials at the time, but no further action was taken.
The peer was a key party strategist and adviser to a succession of Liberal Democrat leaders before standing down due to ill health in 2009.
He said he was "deeply shocked" by the allegations, which he "strongly disputes" and regards as a "total distortion" of his character.
Lib Dem MP Vince Cable said: "It's obviously wrong if there are women there who have made complaints and felt they weren't dealt with properly, so we are now setting up a proper investigative process - we want an independent element to that - and we'll get to the bottom of it."
Former Lib Dem head of press Mark Littlewood said: "Nick Clegg is definitely going to have to outline and spell out in exact detail what he knew and when and what actions he took."
Journalist Michael White told Sky News: "I've never heard any of these rumours about Rennard, and I've known him slightly for years."
On Sunday morning Business Secretary Vince Cable was asked on the BBC's Andrew Marr Show whether he knew about the Lord Rennard allegations prior to the Channel 4 programme, and replied: "Absolutely not."
Labour's shadow minister for equalities and women, Kate Green, said the statement raised more questions than answers.
She said: "After days of total denials - some only hours ago from Lib Dem MPs Vince Cable and Jeremy Brown - Nick Clegg has now been forced to admit that he did know of what he calls 'indirect concerns' about Lord Rennard in his role Chief Executive of the Liberal Democrats.
"Nick Clegg's statement raises more questions than it answers about his judgement and the willingness of the Liberal Democrats as a party to properly investigate such serious allegations at the time they were made.
"At issue is not just a series of serious allegations from a number of women, but how the Liberal Democrat Party responded to those allegations.
"Only with a fully independent investigation can the public have confidence that the truth will prevail and lessons learned for the future."
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