Coun Jason Zadrozny is being investigated by Nottinghamshire Police over what is being described as historic allegations.
The Liberal Democrat, who serves on both Ashfield District Council and Nottinghamshire County Council, had planned to stand as a Parliamentary candidate in the forthcoming general election.
In a statement from police they said: “A man has been bailed following an investigation in historic sexual offences.
“The 34-year-old was arrested yesterday and questioned about an allegation of buggery and gross indecency with a male under 16 between September 2003 and April 2004, sexual activity with a child between May 2004 and December 2007 and an allegation of meeting a child under 16 following sexual grooming from May 2004 and December 2007.
“The offences are alleged to have been committed against one victim.”
In a statement released today, Coun Zadrozny said: “I am today withdrawing my candidacy as a prospective Parliamentary candidate for the Ashfield and Eastwood Constituency.
“Yesterday I was questioned by Nottinghamshire Police about historic allegations, some of which are over ten years old.
“I am in full cooperation with the Police and vehemently refute the allegations.
“I have spent the last ten years championing the cause of the Liberal Democrats both locally and nationally and I do not want this allegation to detract from the real issues facing local residents in the upcoming elections.
“Therefore I will step down with immediate effect as the party’s Prospective Parliamentary Candidate to spend my time clearing my name.”
A spokesman for the Liberal Democrat Party said: “We have been made aware of a police investigation in Ashfield.
“The party has immediately suspended the party’s parliamentary candidate pending the outcome of a police investigation.
“We are unable to make any further comment at this stage.”