A confidential report, obtained by LGC, makes clear that Mr Foster's affair with the head of the policy unit, Kathy Kerswell, broke the DoE's code of conduct for members and left the council vulnerable to charges of maladministration.
The widespread knowledge of the report's contents has led to chaos at Leicester, with more trouble looming.
A Channel Four Dispatches programme due to be broadcast next week will investigate the involvement of Leicester East MP Keith Vaz in council politics, and will certainly cause further ructions.
One source close to the council has suggested that councillors and staff are now nervous that MPs will think twice about granting Leicester unitary status. The order is due to go through next year.
Mr Foster was unavailable for comment this week, but it is widely expected he will be forced to resign at a Labour group meeting next Tuesday. Front-runners to succeed him are Robert Wann, chair of the police authority and a county councillor, and Peter Soulsby, the former leader who Mr Foster ousted in April 1994.
The report, written by town clerk Arthur Price-Jones, presents a damning indictment of Mr Foster's behaviour. It suggests disciplinary action was not taken against Ms Kerswell was 'to avoid contentious, protracted and possibly expensive procedures'.
Her financial transactions within the council were investigated: 'The outcome was that although some financial irregularities were revealed, the value of them was not significant and they appeared to have resulted from errors or oversights on her part rather than [from] any deliberate attempt to defraud the authority.'
Chief executive Imtiaz Farookhi, who tried to resolve the problem by sending Ms Kerswell on a secondment to De Montfort University, it will cost the council more than £21,000, faced calls to resign from Liberal Democrat councillors at a policy and resources meeting on Tuesday night.
Mr Farookhi was also unavailable for comment.