The UK Independence Party has said it could be put out of business by a £367,697 Electoral Commission fine.
The party funding watchdog has said UKIP must return money classed as impermissible due to donor Alan Bown not being on the electoral register.
Leader Nigel Farage said an "establishment" conspiracy was trying to terminally damage the party.
He told a Channel 4 podcast that: "This is an entirely disproportionate use of the law and I feel that a deliberate attempt is being made by the authorities to put us out of business."
And party chairman John Whittaker MEP defended the retired bookmaker's omission from the register as a simple mistake.
"Mr Bown's been living in this country all his life," he said.
"He's run a successful business for forty years, giving jobs to people in this country paying substantial tax.
"You couldn't ask for anyone more British than Alan Bown and yet here's a law designed to prevent political parties getting funding from overseas foreigners.
"It's just outrageous it's the most astonishingly silly decision I could imagine."
In a statement on Thursday, the Commission said it would take legal action against the party.
UKIP will be forced to forfeit the donations, and is also being fined £1,000 for the "unacceptably late" filing of its 2005 annual accounts.
They were filed nearly six months after an already extended deadline, said the watchdog.
And the party’s South East accounting unit will be fined £500 for filing its accounts more than six months late.
The Commission is also "launching a full review of the UK Independence Party's systems for dealing with its financial affairs and meeting statutory reporting requirements" in the wake of claims that more than £100,000 of donations were not properly accounted for.
