Speaking in Parliament on Wednesday, Verhofstadt admitted the recent attempts to forge an alliance between his Alde party and 5 Star had been a "mistake."
But he said his "European convictions" should not be called into question, adding, "Call me naïve, call me stupid but never question my honesty on my European convictions."
The former Belgian Prime Minister was put on the spot when he appeared at a hearing of candidates hoping to become the next Parliament President.
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Several members of the Greens/EFA group, which organised the meeting, quizzed the Belgian on the reasons why he apparently courted cooperation with the 5 Star Movement, which is part of the EFDD group.
Grillo asked 5 Star members to back the initiative in an online ballot.
Many were shocked that an arch federalist like Verhofstadt could consider such cooperation.
But the Liberal said, "The delegation head came to us saying his party no longer wanted to cooperate with Nigel Farage. He said they wanted to be a 'less classic' anti-European party.
"Possible cooperation seemed feasible to me but I told them that there was one condition for this - that 5 Star must sever their links with the EFDD and stop trying to destroy the EU."
"5 Star came back to me saying they were in favour of the single currency and preferred reform of the EU."
Verhofstadt, who earlier had been questioned on the same issue at a similar meeting organised by the EPP group, added that the plug was soon pulled on any deal with 5 Star, adding, "I didn't want to split my group so we didn't do it."
He added, "I have made many mistakes in my life and maybe this was one."
The EFDD group still maintains a group with seven delegations.
On Sunday, when the revelations about ALDE and 5 Star came to light, Farage sent a text to Grillo saying, "Dear Beppe, you are doing very well and I note your recent comments on the euro and the migration crisis.
"My only comment is that it is totally illogical to join a group who favour a European state and want an active European army. They loathe direct democracy."
Farage added, "You may not be there long."
Had the surprise switch gone ahead, it would have seen 5-Star enter mainstream European politics and move away from the anti-system fringes, a shift that some said might reassure other EU capitals that have grown uneasy about its rising popularity.
Verhofstadt is a keen European federalist and his strong, pro-EU views would seem at odds with the Eurosceptic 5-Star, which has previously ridiculed the Liberal leader.
Grillo said earlier this week he had also approached the Greens about a possible tie-up, but was rebuffed, adding that ALDE was the only group willing to discuss an accord with his movement.
5-Star was founded in 2009 and has risen rapidly to become Italy's main opposition party. It does not fit into any clearly defined political ideology, focusing its energies primarily on denouncing corruption and political wrongdoing
Grillo has repeatedly called for a referendum on Italy leaving the euro single currency, and has criticised EU policymaking, but says his party does not want Italy to abandon the European Union.
Had he forged an alliance with Verhofstadt, ALDE would have become the third largest group in Parliament.