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A video posted on TMZ.com shows Richards launching into the tirade after two black audience members started shouting at him that he wasn't funny.
Richards retorted: "Shut up! Fifty years ago we'd have you upside down with a f------ fork up your a--."
"You can talk, you can talk, you're brave now mother------. Throw his a-- out. He's a n-----!" Richards shouts before repeating the racial epithet over and over again.
While there is some chuckling in the audience throughout the outburst, someone can be heard gasping "Oh my God" and various people "ooh" after Richards uses the n-word.
Eventually someone says: "It's not funny. That's why you're a reject, never had no shows, never had no movies. `Seinfeld,' that's it."
Richards performed the next night at the Laugh Factory without incident.
Calls to Richards' representatives were not returned Monday.
He refused to comment on-camera when reached by CNN, but the network reported that he said off-camera he felt sorry for what had happened and had made amends.
Seinfeld issued a statement saying he was "sick over this."
"I'm sure Michael is also sick over this horrible, horrible mistake. It is so extremely offensive. I feel terrible for all the people who have been hurt," Seinfeld said.
Comic Paul Rodriguez, who was at the club, said he thought Richards' remarks crossed the line.
"Once the word comes out of your mouth and you don't happen to be African-American, then you have a whole lot of explaining," he said. "Freedom of speech has its limitations and I think Michael Richards found those limitations."