Quesir Mahmood, 38, was arrested on Monday and questioned by Lancashire Police in connection with alleged postal vote irregularities.
Mahmood, a project manager in the pharmaceutical industry, is standing in the Wensley Fold ward for a seat on Blackburn with Darwen Council.
He has been bailed until 4 June.
A party spokesman said: "The Labour Party takes adherence to the Electoral Commission's code of conduct very seriously.
"The individual has been suspended pending the outcome of any police investigation."
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