Moira Deeming was suspended from the parliamentary Liberal Party for nine months in late March after attending an anti-transgender rally in Melbourne where neo-Nazis performed the sieg heil salute.
In an email, Ms Deeming demanded Mr Pesutto agree to a media statement exonerating her of being a Nazi or Nazi sympathiser by 2pm on Thursday or face legal action.
Ms Deeming confirmed she would make good on her threat in a follow-up email to colleagues, saying the leadership was unwilling to work on a solution because of her setting a deadline.
"Given that the leadership did not make the statement of exoneration, or confirm my return, and that no mediation or even any minutes exist to settle this dispute, I have advised my lawyers to prepare a legal challenge over my suspension," she wrote.
She said the "continued silence" was damaging her name, reputation, family and mental health, and called on the party room to come together for a "do-over meeting".
"If my suspension is re-confirmed, we can make sure the conditions are explicitly agreed upon," Ms Deeming wrote.
In his initial push to expel Ms Deeming, Mr Pesutto sent out a 15-page dossier to supporters linking some of the Let Women Speak rally organisers to far right extremists, including neo-Nazis.
Mr Pesutto insisted he had met the terms of Ms Deeming's nine-month ban involving the release of a joint statement to be prepared by his office and her team.
"What was in the motion stands,'' he told reporters at state parliament.
"Nothing in the dossier ever accused Moira Deeming of being a Nazi or herself having Nazi sympathies."
One senior Liberal MP told AAP Ms Deeming could face another expulsion motion after effectively threatening to sue the entire parliamentary party.
"If anything, this has galvanised support for John," they said.
The threat came as internal party warfare erupted over allegations Mr Pesutto bullied newly-elected MP Renee Heath over the taking of minutes during March's meeting to expel Ms Deeming.
Several anonymous Liberal MPs told the Herald Sun Mr Pesutto accused Dr Heath of tampering with the minutes, resulting in her leaving Tuesday's party room meeting in tears.
Mr Pesutto denied he was a bully, insisted he was not responsible for reducing Dr Heath to tears and said he only raised a "process" issue about the minutes.
"What's reported in the article today is completely wrong," he said.
The Hawthorn MP said he was trying to reform the parliamentary Liberal Party after three consecutive election defeats and called on his team to unite behind the cause.
"If people don't want to be a part of that reform project, then I think it's important they consider their position," Mr Pesutto said.
Opposition equality spokesman James Newbury and former party leader Matthew Guy both described the group of unnamed MPs as "terrorists".
"They're holding the Liberal Party hostage," Mr Newbury said.
"They need to work out whether they're Liberals or whether they want to sit on the cross bench. Everybody's had enough."
Mr Pesutto won a tussle for the leadership of the parliamentary Liberal Party over Berwick MP Brad Battin by one vote in December.
Mr Guy said the disgruntled MPs should speak on the record if they have allegations to air and suggested the majority of the party room backed Mr Pesutto.
Ms Deeming has been contacted for comment.
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