Yorkshire and the Humber MEP Mike Hookem said he was resigning as deputy whip in the European Parliament after the chief whip, Stuart Agnew, declared his support for Anne Marie Waters.
Ms Waters, who founded the Sharia Watch pressure group and who has called Islam "evil", is one of 11 candidates cleared to run in the leadership contest by the Ukip national executive committee.
In a statement, Mr Hookem said he was not prepared to "turn a blind eye" to extremism.
"I strongly disagree with the views Ms Waters and Mr Agnew promote and I would like to put as much distance between me and them as possible," he said.
"If I were to continue in my position of deputy whip, I would be seen as supporting or at the very least turning a blind eye to extreme views and this is not something I am prepared to do."
"I am not a racist and have never campaigned on race issues. While I do believe in controlled immigration, this position is about 'space rather than race'; and I am not prepared to support someone who seeks to single out a section of our society simply due to their religious beliefs."
Mr Hookem's resignation came after Ukip deputy leader Peter Whittle - who is also running for the leadership - defended Ms Waters' right to be a candidate.
"The whole thing was done very rigorously. There was a vetting process. We all had to go through it and if you all get through that then you absolutely have the right to stand. That means Anne Marie should be able to stand," he told the BBC Radio 4 Today programme.
However in a letter to interim Ukip Steve Crowther, Mr Hookem said he was not prepared to continue as a whip due to Mr Agnew's support for a candidate who is "not a fit and proper person to carry this party forward as its leader".
Mr Hookem said he was disturbed by comments by Mr Agnew that he "looks forward to telling his grandchildren in the future how he helped in the fight against Muslims," and would keep a scrapbook of communications from those who disagreed.
"Let Agnew add this to his scrapbook!" he said, in reference to his resignation letter.
The row suggests that the party, already known for the intensity of the infighting among senior figures is facing another bruising contest as it seeks a successor to Paul Nuttall.
Ms Waters' candidacy has divided the party, with some members threatening to quit, while former leader Nigel Farage has warned Ukip will be "finished" if it goes down the road of becoming an anti-Islam party.
Mr Whittle, however, insisted that Ukip was right to speak out on issues like the rising numbers of Islamic Sharia courts in the UK which other parties avoided.
"There are at least 80 courts that we know about. The problem is that the people who suffer the most in these courts tend to be women because they are often about domestic issues and often women who go before the courts don't actually know their rights as a British woman," he said.
"There has got to be one legal system. Certain things happen in Sharia courts which do go against the spirit of our laws."
Mr Whittle denied that his comments were anti-Isalmic. While he acknowledged that the rulings of such courts were not legally binding, he said there was great pressure on participants to accept their findings.