It took 28 MPs more than an hour to thrash out a motion to allow Mrs Deeming's re-entry after the Federal Court found Mr Pesutto defamed her and ordered he pay $315,632 in damages plus costs.
The first-term upper house MP was expelled from the parliamentary party after she attended a controversial rally in March 2023 that was gatecrashed by neo-Nazis.
"This concludes the matter," Mr Pesutto told reporters on Friday after the party room motion failed following a split vote of 14 on either side.
While the opposition leader used his casting vote, Mr Pesutto said technically it wasn't needed because the motion required an "absolute majority" of 16 out of 30 members to pass under the party's constitution.
Two Liberal MPs, Cindy McLeish and Nick McGowan, were absent.
Mr Pesutto and his allies appeared downcast leaving the meeting, but he denied being shocked at the closeness of the result and claimed it wasn't a "slap in the face" for his leadership.
"Today was always foreshadowed that we would ultimately revisit the question," he said.
Mr Pesutto and his allies appeared downcast when leaving Friday's meeting. (James Ross/AAP PHOTOS)
"It's been revisited and today marks a bookend to this discussion."
But Mrs Deeming argued Mr Pesutto had effectively voted twice despite having a "significant personal conflict of interest" in the outcome and said it was "only a matter of time" before she returned to the party room.
"Regrettably, as has been the case from the beginning, John Pesutto's inability to admit his mistakes speaks volumes about his character and fitness for our state's highest office," she said in a statement obtained by AAP.
Former Liberal prime minister Tony Abbott slammed the result as "shameful" and a "contemptible failure to act with honour and decency".
"How can someone elected as a Liberal be expelled on the basis of a lie and not be readmitted once the truth is there for all to see," he posted on X, formerly known as Twitter.
Mr Pesutto said the failed vote marked the end of the matter. (James Ross/AAP PHOTOS)
The motion was signed by Benambra MP Bill Tilley, opposition emergency services spokesman Richard Riordan and first-term backbenchers Renee Heath, Joe McCracken and Chris Crewther.
Upper house MP Bev McArthur said Federal Court Justice David O'Callaghan had done everything but demand Mrs Deeming's re-entry into the party room and her colleagues had spurned a chance to right a "terrible wrong".
"That was our job today and we failed," she said.
Shadow cabinet secretary Ann-Marie Hermans, who also backed the motion, said the draw meant the issue was not resolved.
Mr Riordan agreed the matter had not been resolved as the party was "split down the middle", while Mr Crewther cautioned "it may be difficult to unite".
An ally of Mr Pesutto, speaking to AAP on condition of anonymity, admitted the issue wasn't going away and was unsure if Mr Pesutto could survive.
"This is the worst result. It's shocking," the Liberal MP said. "There's a massive divide."
The Liberals will run candidates in upcoming state by-elections in Prahran and Werribee following the resignations of Greens MP Sam Hibbins and long-serving Labor treasurer Tim Pallas.
The internal upheaval stems from Mr Pesutto being found to have made defamatory comments implying Mrs Deeming was associated with Nazis following the 2023 Melbourne rally.
She was initially handed a nine-month suspension from the parliamentary party before being booted after threatening to sue Mr Pesutto.
Mr Pesutto refused to resign following the Federal Court decision, triggering former tennis player turned Nepean MP Sam Groth to quit the shadow cabinet.
On Friday, the leader confirmed he won't appeal the judgment despite suggesting there were "potential grounds" to do so.
20°C