The British National Party has used a photograph of the bombed London bus for an election leaflet.
The BNP says the bus photo is a graphic image
"Maybe now it's time to start listening to the BNP," says the slogan alongside the photo in a leaflet for a council by-election in Barking, east London.
Home Secretary Charles Clarke said the BNP "have tried to cynically exploit the current tragic events in London to further their spread of hatred".
BNP leader Nick Griffin said the photo showed the cost of voting Labour.
The leader of the Conservatives in London, Bob Neill, said it was "disgraceful and sick... as contemptible an election tactic as I have ever seen in my life".
The BNP's best result in the general election was in Barking, where it took 16.89% of the vote.
'Targets for Iraq'
Mr Griffin told BBC Radio 4's Today programme: "It is obviously a very graphic, horrific image which really sums up the cost of voting Labour.
"Obviously Islamic terrorists carried out the attacks, but it is the Labour Party's fault they did it.
"By voting Labour, people gave us a Government which took us into an illegal war in Iraq that turned us all into targets.
"It is the Labour Party that has lost control of our borders, so there is a huge sea of potential terrorists out there and the police can't see who is doing it.
"The Labour Party for years has allowed Islamic extremists to preach in mosques in Britain and use them to recruit people to their cause. It is the Labour Party to blame."
Margaret Hodge, Labour MP for Barking, said: "It is despicable that the BNP is using what was an enormous shock and tragedy for Londoners to try and lay the blame on ethnic minorities."
And Tory shadow home secretary David Davis said: "This tasteless and bigoted leaflet shows the depths to which the BNP have to sink."
Tony Blair has said those behind the blasts are trying to destroy the British way of life and stresses that the 11 September attacks on America preceded the Iraq war.
He also says Islamic militants have perverted the true faith of Islam and points to how Muslim leaders have condemned the bombings.
Massoude Shadjareh, of the Islamic Human Rights Commission, told the Guardian newspaper: "Muslims were victims of Thursday's attack, and they have abhorred these crimes as much as their co-citizens.
"They have suffered the trauma and the aftermath and they fear further attacks just as everyone else."