That's an awesome looking piece of wood, I can see why you got it! Sorry it's causing you this hassle though. I agree with the above advice to take it out, do what you can to scrub/boil/dry it out, then stick it outside and let it age for a while. I don't think it'll harm your fish if it hasn't already, but I suspect that it'll keep producing the gakky stuff faster than you can clean it up...
With the nitrites rising and putting your lifestock at risk, I would take it out immediately and get the water back to safe levels, and keep manually removing the yuck from everything.
I had a similar problem. Bought this piece in a LFS, cleaned it in water as hot as I could stand, poured some kettles of boiling water over it, boiled the base in a pot for a while before flipping it and trying to boil the other ends etc. Then I soaked it until it waterlogged. All looked okay while it was soaking, so I stuck it in my otocinclus tank;
It was great for about a week, developed the usual ethereal biofilm that the otos were cleaning off, but then this happened;
Not the normal biofilm! Clearly some sort of fungus. The fish were fine, but I took it out and scrubbed and boiled it again, got it looking like new, and put it back in.
But the fungus came back again.
I took it out and decided to try scrubbing it with salt. Since salt is mildly abrasive and has anti-fungal properties, figured it was worth a try. Sprinkled salt all over it and scrubbed at it with a bristle brush, then soaked it in salty water for a while before rinsing and doing the boiling water again to remove the salt. Put it back in the tank.
You can guess what happened;
Since the fish were doing fine and I was sick to death of scrubbing this thing, I watched and waited for a while to see how it would develop. Thought that maybe it would go away after some time, but it only got worse every day. Got so ugly and annoying to me after a week or two that I took it out and resigned myself to the fact it wouldn't work. Gave it another clean and left it exposed to the elements in the garden to weather and dry out. It's been out there for six months, I'll probably give it a year before trying again; by which time the tanks probably won't have room for it *sigh*
Mine didn't affect the water and plants or cause such a mess to clean up at least! Sorry to see what's happened with yours, I know that must
suck to try to clear up. If you can't or don't want to leave it outside for months (and there's no guarantee it won't do the same thing again after a year in the garden either!), you could try taking it back to the store, show them the photos and ask for a refund or exchange. I think you'd have every right to get your money back so you can get something else!