A settlement between Victorian Opposition Leader John Pesutto and dumped MP Moira Deeming broke down over her demand to return to the parliamentary party with no strings attached.

The first-term MP was expelled from the parliamentary Liberal Party after she took part in a rally in March that was gatecrashed by a group of masked men who performed Nazi salutes.

Deeming issued several defamation concerns notices to Pesutto, alleging he publicly accused her of being a Nazi sympathiser and used the claim to bully and threaten her with expulsion.

Pesutto denies he accused the now independent MP of being a Nazi or having Nazi sympathies.

The pair had been locked in mediation, with Deeming seeking an exoneration from Pesutto, financial restoration and her return to the Liberal Party room.

Deeming declared on Monday mediation had failed, saying her lawyers would lodge defamation proceedings with the Federal Court.

Pesutto, who has vowed to defend himself, confirmed he and Deeming had reached a “tentative settlement” on several issues but her path back into the parliamentary party was the sticking point.

“There was one outstanding issue and that was returning to the party room without conditions and without the party room being involved in any decision-making on that,” he told reporters on Wednesday.

“I was never going to accept that.”

No court can direct a parliamentary party to readmit a member, the former industrial lawyer added.

Pesutto was unaware if proceedings had been filed yet, but reiterated no party funds would be used in his legal defence.

“If I have to pay for it myself, I will,” he said.

– AAP