The decision comes as colleagues moved to defend the councillor, claiming he is one of the hardest-working elected members of Highland Council.
The Inverness Courier exclusively revealed on its website yesterday afternoon that Councillor Holden's home in Drakies was searched on Monday in a joint operation by Northern Constabulary, Highland Council and fraud investigators from the Department for Work and Pensions (DWP).
It is understood various items, including computer equipment and paperwork, were seized during the swoop which is believed to involve benefit fraud.
The Labour councillor — who was elected in 2007 to represent the Inverness South ward — was later questioned for several hours by police officers. When asked about the incident Councillor Holden said: "I've been advised not to comment."
A statement issued on behalf of the Labour Party said: "The councillor in question has been suspended from office or representation of the Labour Party, pending the outcome any investigations.
"This includes suspension from membership of the Highland Council Labour Group.
"Mr Holden will neither be entitled to attend Labour group meetings nor to represent the group in any capacity.
"This suspension does not imply that the Labour Party has taken a view on the outcome of any investigation, but is designed to protect the party's interest until this matter is finalised."
The council's Labour leader, Councillor Jimmy Gray, could not be contacted for comment yesterday and Councillor Michael Foxley, leader of the new rainbow alliance, did not want to comment on hearsay allegations.
Councillor Jim Crawford, a member of the newly-formed Independent Members Group, defended his fellow ward member. "A lot of people in Inverness South think very highly of him," he said.
A spokesman for Northern Constabulary confirmed a man had been questioned in relation to allegations of fraud.
Both Highland Council and the DWP confirmed they were working with police on the ongoing investigation.