Simon Bridges is fighting fire with fire and refusing to back down from Jami-Lee Ross' attack.
Mr Ross laid a police complaint on Tuesday about what he says was electoral fraud on the part of Mr Bridges. He claims the National leader told him to split up a $100,000 donation to hide it from the Electoral Commission.
As evidence, he released audio of a conversation he had with Mr Bridges in June which he secretly recorded and held onto.
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Speaking to media after another explosive day, Mr Bridges called Mr Ross a "liar" and a "terrible person".
"Jami-Lee Ross is a person who lies, leaks and in this conversation, deliberately tried to set me up."
He believes Mr Ross has been secretly recording conversations with him and other National politicians for "many, many months".
"It is a gross breach of trust."
Under New Zealand law it's not illegal to record a conversation as long as one party in the conversation knows it's being recorded.
Mr Bridges said Mr Ross' is "wrong in every regard around electoral laws".
"The reality is he's defamed me. He's made vexatious, criminal allegations to the police, and he's attempted to blackmail me."
He says it'll take police "precisely four minutes" for them to realise Mr Ross' claims are "bogus".
However he said he probably wouldn't pursue legal action against Mr Ross despite the serious nature of what he did, claiming it's "not worth the time and effort".
Mr Bridges and Mr Ross both made racially charged comments when discussing possibly ousting sitting MPs in favour of new ones.
"Two Chinese would be nice, but then would it be one Chinese and one Filipino?" Mr Bridges said.
"Two Chinese would be more valuable than two Indians, I have to say," Mr Ross replied.
"Yeah, which is what we've got at the moment," Mr Bridges said.
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When asked if he would apologise to New Zealand's Chinese and Indian communities, Mr Bridges said he didn't think it was necessary because people will "know what I meant".
"I'm proud of the fact that National [wants] to represent the mix of New Zealand. Actually that's the right thing to do. That was a blunt, private conversation, but that's what I was getting at and I think that's important."
He said the discussion around Chinese MPs was simply strategic, rather than racist.
"If you look demographically at what is happening in New Zealand, in truth, for National to be representative of that, I think there is a strong argument for opening it up to more Chinese Members of Parliament."
He also denied suggesting that donations could buy candidacy in the National Party, claiming that was an unfair categorisation of what he said in the recorded conversation.
As for the disparaging comments he made about several National MPs, Mr Bridges said he'd apologised to Maureen Pugh - who he called "f**king useless" - but declined to say whether Chris Finlayson, David Carter and Nicky Wagner would also receive an apology.
Mr Bridges said he's still confident in his leadership, and believes National will recover from the chain of events that started when someone - Mr Ross, the evidence suggests - leaked his expenses in August.
"He's a terrible person," he said of Mr Ross. "We're going to put him behind us."