At a private TV channel talkshow, Raut had made certain remarks claiming Indira used to come and meet the late mafia don among other things.
"I did not say anything to damage Indira Gandhi's image... I have the greatest regard for her...
"However, if my comments have hurt peoples' sentiments, I am taking them back," Raut told the media as the issue threatened to rock the two-months-old Sena-NCP-Congress' Maha Vikas Aghadi alliance government in the state.
Earlier, Maharashtra's Leader of Opposition Devendra Fadnavis demanded to know whether the underworld mafia was financing the Congress and sought a clarification from its leaders Sonia Gandhi, Rahul and Priyanka, here on Thursday.
Referring to Raut's claim that Indira Gandhi used to meet the mafia don, the Bharatiya Janata Party leader and former Chief Minister said in view of these serious revelations, now the Congress must bare its chest on the issue.
In the private TV channel talkshow in Pune on Wednesday, Raut had claimed that Indira Gandhi used to come to meet the don (Lala) in Pydhonie, his den in south Mumbai.
It sparked fresh controversy. "There were days when the likes of Dawood Ibrahim Kaskar, Chhota Shakeel, Sharad Shetty decided on who would be the Commissioner of Police of Mumbai or who would sit in Mantralaya...
"When Karim Lala used to come to Mantralaya, the 'entire' Mantralaya would come down to meet him... We have seen that 'underworld', now it is just 'chillar' (insignificant)," Raut said in the talkshow.
A former journalist and crime reporter in Mumbai, Raut added that he had conducted a photo session for Dawood and others, and even chided him once, but that was a different era and now all the (dons) have fled the country.
Fadnavis said in view of Raut's claims, the Congress must come out with its stance on the issue, how the underworld was influencing the decision-making in the state government, etc.
There were ripples even in the ruling state ally, Congress with former Mumbai city chiefs taking strong objections to Raut's utterances though there were no reactions to either Raut or Fadnavis' comments from the Congress state or central leadership.
"Those who indulge in such fake propaganda about former PM Indira Gandhi will have to repent...He must withdraw his statements immediately," ex-Mumbai Congress president and former MP Sanjay Nirupam said.
"Indiraji was a true patriot, who never compromised on national security. I demand that Sanjay Raut withdraw his ill-informed statement.
"Political leaders must show restraint before distorting the legacies of deceased Prime Ministers," said former city party chief and ex-union minister Milind M. Deora.
This is the second huge fracas that has erupted in two days after Raut's remarks on the descendents of Chhatrapati Shivaji Maharaj also ignited protests against him in Mumbai, Satara and Pune, besides strong reactions from the Chhatrapati kin, all now in the BJP.
( With inputs from IANS )