New Zealander Williams called Woods a "black arsehole" during the annual caddies' awards at the seven-million-dollar HSBC Champions in Shanghai on Friday, overshadowing the action at Asia's flagship event.
He made the extraordinary outburst when asked about his controversial celebrations following a victory by his new employer, Australian Adam Scott, at the Bridgestone Invitational in August.
Williams, who was sacked by Woods in July after being at the former world number one's side for 13 of his 14 major championship titles, described Scott's victory as the "best win of my career".
Addressing the room after being handed a tongue-in cheek "celebration of the year" gong, Williams, 47, shocked players, fellow caddies and sponsors by saying: "It was my aim to shove it right up that black arsehole."
Williams, who made an estimated $3 million during his career with Woods in what was one of the most successful partnerships in the history of golf, later issued an apology on his kiwicaddy.co.nz website.
"I apologise for comments I made last night," he said in a statement."I now realise how my comments could be construed as racist. However I assure you that was not my intent. I sincerely apologise to Tiger and anyone else I have offended."
Williams is known for his outspokenness and gruff personality.
At a previous private function he called Phil Mickelson a "right prick" and he has made a series of backbiting remarks about Woods since their acrimonious split.Scott, the world number eight, was among a clutch of top-10 players including Rory McIlroy in the 100-strong audience listening to Williams' comments in the banqueting hall.
Scott, 31, teed off on Saturday with Williams at his side as the storm around the caddy's comments gathered strength. The Australian goes into the final day in third, three shots behind leader Fredrik Jacobson.
"I disagree that he should be sacked," said Scott when asked about the future of his bagman.
Mark Steinberg, Woods' former spokesman and manager, said it was "sad" for Williams to bring racism into his bitter falling out with the golfing legend.
"I was with Tiger last night when he heard the news. We got multiple calls from people who sounded like they were leaving the caddy party," he told reporters.
"Tiger obviously wasn't there. He doesn't know exactly what was said. But if multiple reports, which all seem to be accurate, are true, then it is sad it has come down to this.
"It's a regrettable comment and there's really nothing that Tiger can do or say. He's just going to move on."
Many players refused to comment but Northern Irish star Graeme McDowell agreed with Scott that Williams should stay in his post and said the caddy's comment was not racially motivated.
"I don't think Stevie Williams was trying to be racial. I don't think it was a racial comment. I think he was trying to be funny and make a joke of it," said McDowell.
McIlroy also said Williams' apology should suffice."It's just unfortunate that there's been such an argument between a player and a caddie. I've heard that since then Stevie has apologised for his comments and I think now that he's done that everyone can just move on and sort of put it behind them," said the US Open winner.
