The Labour MP for Swansea East Carolyn Harris was accused during a Crown Court trial of “outing” her former constituency office manager Jenny Lee Clarke.
Clarke accused Harris of referring to her “dyke boots” when they worked together for former Swansea East MP Sian James.
The MP told jurors at Cardiff Crown Court that she could not remember using the phrase but said if she had it would have been “banter”.
She has now apologised saying that hearing the alleged slur in court “struck her to the core”.
"It was alleged that I made a homophobic comment towards Jenny. I honestly do not remember making such a comment and hearing it alleged in court struck me to the core.
"In looking to answer - honestly - I said that in the context of our time working together that 'If I did it would have been banter'.
"I was trying to express that I would not want anyone to feel as if I were targeting them because of their sexuality, something I would never do.
"But I failed, with clumsy language that only served to make it appear as if I was trying to minimise the issue.
"I understand that banter was an entirely inappropriate - indeed offensive - word to use.”
Clarke was cleared of two charges of fraud and forgery by the jury earlier this week.
‘It is never banter - it’s homophobic language’
Assembly Member Jenny Rathbone said Harris should stand down as shadow equalities minister to “clear her name”.
"There's clearly a question mark as to whether it is appropriate for Mrs Harris to continue," she told BBC Radio Wales.
She added that "had all these issues been known about before the election I think it would have affected the number of people who put in their votes for Mrs Harris" to be deputy leader.
Hannah Blythyn, Welsh Government environment minister and a former chairwoman of LGBT Labour, tweeted: "It's never banter - it's homophobic language.
"It's not appropriate. It's not ok. Disappointed and saddened by this."