Mr Gallagher contacted a number of his business friends to invite them to attend the dinner, where guests were asked to donate up to €5,000 to the party.
The select group of businessmen invited to the fundraiser were promised exclusive access to the new Taoiseach.
Mr Gallagher will now face questions about the organisation of the function, the list of businessmen in attendance and how much was raised for the party.
He invited a small number of his friends, associates and business contacts and passed on some details to party chiefs in Fianna Fail headquarters to issue invitations.
Mr Gallagher's spokesman insisted last night he did not himself contribute to the event and nor did he solicit donations.
Throughout his presidential campaign, Mr Gallagher has downplayed his role in the party, claiming he was an ordinary grassroots member.
One of Mr Cowen's first acts as leader of Fianna Fail was to scrap the controversial fundraising tent at the Galway Races.
But the dinner in Dundalk, which took place even before that year's Galway Races event, shows the party was still involved in aggressive fundraising among big business.
Mr Gallagher's claims to be an independent candidate representing a new kind of politics will be damaged by the revelations. After surging to the top of the polls, he has come under attack about his Fianna Fail links.
Mr Gallagher only resigned from the party's ruling body, the national executive, this year. The 'Dragons' Den' star also launched the campaigns of a number of Fianna Fail candidates in the general election.
Mr Gallagher's spokesman said last night the candidate would have passed on some details of contacts to the party. But he insisted the fundraiser was organised centrally by Fianna Fail headquarters.
" Sean Gallagher did attend the event. He was not requested to donate nor did he, either before, during or after the event, make a donation in a personal capacity or a corporate donation," the spokesman said.
"At no point did he actively solicit any donations. He would have been in touch with a number of people he knew to tell them it was on," the spokesman added.
Fianna Fail last night confirmed the fundraiser, which was never previously publicised, was held at the time. "Yes, we organised a dinner in Louth in 2008. We organised it to help defray the cost of the 2007 general election. All of the donations are all recorded and reported in line with regulations," a spokesman said.
But a local businessman told the Irish Independent he was contacted directly by Mr Gallagher. "He rang me up and said they were holding a function in the Crown Plaza. He had pull where nobody had pull," he said.
The prominent businessman in the north-east said Fianna Fail drew up a list of wealthy potential benefactors and targeted them. "I was one of 40 listed to contribute €5,000 a head. There were 40 people selected in the county to attend. I swear to God," he said.
Last week, Mr Gallagher had to clean up the mess he made in failing to criticise Fianna Fail's record in power.
Widely regarded as the worst moment of his campaign to date, Mr Gallagher was exposed on his links to Fianna Fail when he repeatedly refused to say a bad word about the party in the Prime Time debate. After repeatedly failing to say if he believed his former party let the country down, Mr Gallagher now says he "abhorred" the decisions made by the last Fianna Fail governments. "I couldn't condemn the ordinary grass roots members of the party throughout the country, ordinary decent people, who were not in government who were not in Cabinet, who did not make decisions," he said a week ago.
But Mr Gallagher had direct access to Mr Cowen through his involvement in the party and was trusted enough to be involved in fundraising.
Although he repeatedly stresses he was not involved in the party all his adult life, he did have a substantial involvement.
Mr Gallagher was a member of Ogra Fianna Fail and served on its national committee. He was also a member of Fianna Fail. He served as an adviser to a Fianna Fail minister and worked for its headquarters. Mr Gallagher acted as director of elections to a Fianna Fail TD. He served on the Fianna Fail national executive, its ruling body. He was appointed to a state board by a Fianna Fail minister and considered running as a Fianna Fail candidate in the general election.