Russell Galt has accused Senator George Brandis of having made the comments at a meeting in May last year and of complaining that the party would have to make excuses for Mr Howard again.
Mr Howard has strongly denied he was told three days before the 2001 federal election there was no evidence to support the government's claim that asylum seekers had thrown their children into the sea.
Mr Galt says he decided to comment publicly on Senator Brandis' remarks after a former defence advisor, Mike Scrafton, recently raised concerns about the incident.
Senator Brandis says claims he described the prime minister as a 'lying rodent' are highly suspicious and timed to discredit today's renewed children overboard hearing.
"Not only is it not the sort of language I use, but I have been aways of the view - I have been convinced - having listened carefully to the evidence in the first children overboard inquiry, having read the material, having followed this debate more closely than practically anyone else in the country, I am convinced about the Prime Minister's integrity on this."
Despite the denials, Mr Galt has released a statutory declaration saying he heard Senator Brandis make the comments.
The Federal Labor leader Mark Latham says Mr Galt's comments further undermine the Prime Minister's credibility.