Watchdog casts doubt on legality of loans

The row over Labour and the Conservatives' secret loans exploded back into life tonight after the electoral watchdog said it doubted the original loans were made on commercial terms - and threatened to use legal power to force the parties to give further details.

In a statement, the Electoral Commission demanded further details of the £13m pledged to Labour and the estimated £24m given to the Tories in the form of secret loans before the last election.

It said: "In our view, questions remain about whether these previous loans were made on commercial terms, and therefore whether parties are right to maintain that no element of them should have been reported as a donation.

"The commission will, therefore, be requesting an explanation of their rationale for concluding that loans were made on commercial terms and asking them to provide supporting evidence for their decision.

"The Electoral Commission has powers, under Section 146 of the Political Parties, Elections and Referendums Act 2000, to require political parties to provide relevant documents, records and other information about their income and expenditure.

"If necessary, we would be prepared to exercise these powers to obtain the information we require to judge whether a political party has fully complied with the law."

The government had hoped to put the affair behind it, after announcing last week it would legislate to make all loans public.

In the Commons today the deputy prime minister, John Prescott, also suggested that state funding for parties was now almost inevitable in the wake of the row.

Standing in for Mr Blair, who is now in Indonesia on his tour of the southern hemisphere, Mr Prescott told MPs: "I think we will have to increasingly move towards a form of state funding."

Under electoral law, if the loans were given at preferential rates of interest, or the money was not expected to be paid back, the funding would have counted as a donation.

All parties were given until 5pm to give the commission details of any loans, a deadline which was met by the three main parties and several others.

But the commission demanded further details and insisted it would be prepared to use its legal powers if necessary.

In a statement, it said: "The parties concerned have said that the loans they have received and not so far reported are on commercial terms and they involved no benefit that should have been declared.

The Liberal Democrats wrote to the commission to say that they had no such loan arrangements.

The move came as Scottish National party leader, Alex Salmond, called on Tony Blair to quit Downing Street, claiming he was "mired in scandal".

And it also emerged today that the senior Scotland Yard detective leading an inquiry into the row warned he had not ruled out corruption charges.

In a letter to MPs who are also investigating claims that peerages were "sold" for political donations, Deputy assistant commissioner John Yates said that prosecution was "the only credible deterrent for any briber".

He added: "While it may be too early for us to widen our investigation into the arena of corruption, I certainly have not ruled this out."

Mr Yates's letter persuaded the Commons public administration committee to suspend its inquiry in case it prejudiced any possible criminal proceedings.

Many of those the MPs wanted to question "could be central to our criminal inquiry, either as witnesses or suspects", he pointed out.

The committee had been due to take evidence yesterday from two wealthy Labour backers, Chai Patel and Sir David Garrard, who together lent the party more than £3m.

Their nominations to become working Labour peers were subsequently blocked by the House of Lords appointments commission.

Mr Yates said his inquiries were at a "very early stage" and charges were "not imminent".

The public administration committee said in a special report last night that it had agreed to a "short pause" in its inquiry to give police a chance to say whether there was a "realistic prospect" of charges being brought.

Among the other witnesses due to give evidence is Mr Blair's personal fundraiser Lord Levy, who raised £14m in undeclared loans to pay for Labour's general election campaign.

Tony Blair's official spokesman declined to comment on whether the prime minister was prepared to give evidence either to the police or select committee inquiries.

"I'm not going to give a running commentary into investigations, full stop," he said, speaking from the Indonesian capital Jakarta. "I wouldn't comment on any other investigation. Why should I comment on this one?"