Caroline Spelman paid the woman, Tina Haines, for secretarial work from public funds while also providing free board and lodging in return for childcare, the party said.
The arrangement, which began when Spelman was elected as an MP in 1997, was ended after a separate secretary was appointed following a conversation with the party's chief whip.
"Caroline decided that although she had not done anything wrong, it would be better to have separate arrangements for her secretarial staffing and her childcare," it said.
Spelman had paid Haines from her parliamentary staffing allowance for "the work she carried out providing secretarial support in the constituency," the party said.
But Labour MP Kevan Jones said there was a "big question mark" over Spelman's use of expenses, claimed during 1997 and 1998, after BBC's Newsnight raised doubts over the amount of secretarial work the nanny actually did.
Jones said Spelman should be referred to parliament's standards watchdog if she could not explain her use of the allowance.
The staffing allowance is intended to meet the cost of assistants helping MPs with their parliamentary work, and is not meant to cover expenses incurred running their private lives.
Newsnight said Spelman's nanny appeared to have done little parliamentary work outside her childcare duties.
"I did obviously do odd secretarial things for her - took phone calls and if there were any documents that she needed posting," the programme reported Haines as saying.
Asked by the programme if the bulk of the work was nannying she said: "Yeah, I did nannying, yeah."
The scrutiny of Spelman's expenses comes in the wake of the resignation of Giles Chichester as the Conservative party leader in the European Parliament, after he broke rules by transferring more than 400,000 pounds of expenses into a family business.
Spelman had as party chairman herself issued a deadline to Chichester to provide details of the payments.
On Friday another Conservative MEP, Den Dover, was replaced as party whip over his payment of 750,000 pounds in expenses to his wife and daughter, even though he insisted he had acted within the rules.
Conservative Shadow Chancellor George Osborne told BBC radio that Spelman was a person of "enormous integrity" who was the "last person in Parliament who would want to do something wrong."
