Nick Clegg has ruled out senior peer Lord Rennard playing a role in his 2015 election campaign but the party's former chief executive is set to return to a position on a key Liberal Democrat committee after being told he will not face disciplinary action over claims of sexual harassment.
An investigation by a leading QC concluded there was a less than 50% chance the allegations against female activists could be proved beyond reasonable doubt, but there was credible evidence of "behaviour which violated the personal space and autonomy of the complainants".
The report suggested that Lord Rennard should apologise and make a "commitment to change his behaviour".
The investigation into the allegations by Alistair Webster QC followed a decision by the Metropolitan Police last year not to press charges against the peer.
Deputy Prime Minister and Lib Dem leader Mr Clegg said: "People in positions of authority should never subject anyone to behaviour which is offensive or inappropriate. It is as simple as that.
"I want everyone to be treated with respect in the Liberal Democrats. That is why it is right that Chris Rennard has been asked in the report to apologise, to reflect on his behaviour and why he won't be playing any role in my general election plans for the campaign in 2015."
Lord Rennard, who had strenuously denied the allegations, said he looked forward to resuming his roles within the party after the decision to drop disciplinary proceedings.
The peer was elected to the Lib Dems' Federal Policy Committee (FPC) for a two-year term in 2012, before the allegations against him were reported on Channel 4 News.
Although he has not attended FPC meetings since the claims against him were made, it is understood he now intends to resume his work on the committee until his term expires later this year.
The Liberal Democrats were accused of "cowardice" by Alison Goldsworthy, one of the activists who made claims against Lord Rennard.
Mr Clegg admitted the Lib Dems' rules had been "found wanting" and party president Tim Farron was reviewing the disciplinary procedures.
The Lib Dem leader said : "It's clear in the report that a number of women in the Liberal Democrats were subject to behaviour by someone who had a position of considerable authority which caused them real distress.
"That should not have happened and I, as leader of the Liberal Democrats, want to apologise to each and every one of those women again."
He added: " I am not content with the fact that a report concludes that - while of course we should respect the outcome of the report - that nonetheless the system is such that someone has been asked to apologise, distress has been caused, and yet there are no sanctions which can be applied."
Lord Rennard, 53, welcomed the end of the process which had begun almost a year ago.
He said: "I am pleased that this brings to an end all investigations concerning allegations made against me on Channel 4 News last February.
"The Metropolitan Police also investigated the allegations thoroughly and over several months and found that there was no case to proceed.
"My wife Ann and I are very grateful to our families and many friends both inside and outside the Liberal Democrats who have shown unwavering support throughout.
"We are particularly grateful to Alex Carlile QC, who helped us to ensure that justice was eventually done, and to Richard Cannon of Janes Solicitors who guided us through the police processes.
"I now look forward to resuming my roles within the Liberal Democrats. I remain committed to the same values which made me join the Liberal Party as a teenager more than 40 years ago."
Experienced criminal barrister Mr Webster was asked to investigate whether the peer should face a disciplinary hearing charged with bringing the party into disrepute, which could ultimately have led to him being thrown out of the Lib Dems.
He said: "My view, judging the evidence as a whole, is that there is a less than 50% chance that a charge against Lord Rennard could be proved to the requisite standard.
"In my opinion, the evidence of behaviour which violated the personal space and autonomy of the complainants was broadly credible. However, it is my judgment, considering all of the evidence collected, that it is unlikely that it could be established beyond reasonable doubt that Lord Rennard had intended to act in an indecent or sexually inappropriate way. Without proof of such an intention, I do not consider that such a charge would be tenable."
Ms Goldsworthy said she was taking legal advice as she condemned the decision not to proceed.
She said: " Faced with the opportunity to take strong action, the Liberal Democrats have once more opted for cowardice."
Mr Webster's call for Lord Rennard to apologise and change his behaviour was "only a step in the right direction", she added.
A review of the party's handling of the complaints last year sharply criticised Mr Clegg and two other Lib Dem ministers, Danny Alexander and Jo Swinson.
Businesswoman Helena Morrissey, who conducted the inquiry, said that there should have been a formal investigation launched when his accusers first came forward.
Mr Farron said the process had been an "uncomfortable experience" for the Lib Dems and had prompted the party to take a "long, hard look in the mirror".
He said: "While this process has not found to a criminal standard of proof that Lord Rennard acted with indecent intent, it is clear that he did not behave in the way that a chief executive should behave. Lord Rennard must reflect on his actions and apologise to the women involved."
Ms Goldsworthy and Bridget Harris, a former special adviser to Nick Clegg, criticised the party's response and called for Lord Rennard to be kicked out.
"I don't think a public apology is really enough," Ms Goldsworthy told Channel 4 News. "He needs to think about what's appropriate for him to do as a result of the actions that he undertook .
"It was very serious what happened to Bridget and to I and to many others and if this was an employment situation, someone would be out of the door without their feet touching the ground. Why is this any different?
"Nick Clegg should show a bit of leadership in this actually. He could go beyond what he said ... actually he needs to say, no this is not okay. He could withdraw the Whip. He could just say I'm not having this and you're not going to be a member of my party and I think fair-minded and reasonable people would back and support that. I don't understand why they're not doing that. Are they scared Chris is going to have some sort of response?"
Ms Harris said: "If Nick Clegg is saying it's acceptable to have Lord Rennard in the party because that's what the rules state, that it's acceptable to behave the way he behaved, that there is nothing the party can do about it, then that's up to him. My advice to him would be kick the guy out because I think he has proved he has taken the party into disrepute. We can't get rid of members of the House of Lord regardless of what they do."
She added: " I would question if you are a woman in Westminster today whether you are being told that you are welcome inside the Liberal Democrats as a safe place to operate. But I also equally would say that there are questions over the Conservatives and the Labour Party in Westminster too. It's a very sleazy place.
"I'm going to leave the Lib Dems. I just don't want to be a member of the party. If Lord Rennard isn't going to leave the Lib Dems, I'm going to."
Ms Harris said the Deputy Prime Minister had apologised to her and he was "flabbergasted" by the situation.
She told BBC 2's Newsnight: "I spoke to Nick earlier on this evening personally, he called me and apologised and I take that completely sincerely.
"He apologised for the fact that the party has found itself in a situation where its rules have been found to be completely over the top and Byzantine and inadequate to deal with the kind of complaints that myself and the other women have had about Lord Rennard."
She added: "I heard Tim Farron speak earlier and Nick Clegg said this to me as well, they are flabbergasted that essentially we are in a situation where a man...where the allegations and the evidence have now been thoroughly tested and have actually been found to be credible, so nobody is suggesting that they think we are lying."