Tony Abbott would have stopped Victorian Liberals if he had known they were using the theme of stripping citizenship from terrorists to raise funds for the party's election campaign, his office says.
The prime minister features in a Victorian Liberals email under the theme: "Donate now to support a safer Australia" and is quoted as saying: "Terrorists who are dual nationals will have their citizenship stripped."
But Mr Abbott's office says he would have stopped the campaign, had they been told.
"The prime minister and his office had no knowledge of the email sent by the Victorian State Division of the Liberal Party. If the prime minister had been aware, he would have stopped it," a spokesman said.
The controversial email says Labor and the left are playing politics with national security, weakening borders and are a soft touch on home grown terrorists.
"With a federal election due next year donations are critical to allow the Abbott government to continue on with the job of keeping Australia safe," it added.
Liberal senator Arthur Sinodinos said it was "not a good look" to cash in on the issue.
"It's not appropriate," Senator Sinodinos told Sky News on Wednesday.
He said it was especially wrong as the government was seeking bipartisanship to pass national security laws.
In a statement, a Victorian Liberal Party spokesman admitted the email was a mistake.
"This was wrong. The state division should not have made a link between this important legislation and a request for donations," the spokesman said.
"Neither the prime minister, nor the PM's office or the Federal Liberal Party was aware of the email or donation request."
Bill Shorten said it was in "staggering poor taste" that the Victorian Liberals would seek to exploit national security to raise money.
"It shouldn't be the source of political fundraising," the opposition leader told reporters in Canberra.
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