The allegation flies in the face of an angry dismissal by John Major of an earlier report of the link as 'fantasy'.
In a surprise intervention in a heated debate over party funding, Clive Soley, Labour MP for Hammersmith, produced a letter he said backed Guardian claims yesterday that up to pounds 7m had been donated secretly before the last general election.
After two cabinet ministers and the party chairman, Sir Norman Fowler, had all denied any Saudi involvement, Mr Soley read the first page. It said: '. . . a meeting took place in the residence of Prince Sultan Bin Abdul Aziz in The Boltons (London) SW10, between Prince Bandar, son of the aforementioned, and the ambassador of Saudi Arabia to the United States, with Michael Heseltine and two other people unknown to me.
'The subject of the meeting was to aid the Conservative Party (financially) and their efforts against the Labour Party. As far as I have been informed by people at the embassy this task was delegated to Mr Hattab Alonzi, press attache, via his superior General Ali Al-Shaqier, Minister of Communications and Media.'
Mr Soley was satisfied the writer was a different source from the Saudi informants behind yesterday's Guardian report of a meeting between Prince Bandar Bin Sultan and an unnamed minister in March last year. He said the problem was the secrecy of donations. 'Letters like this are inevitably going to be used. This is a legitimate challenge to the Government to publish the accounts.'
Late last night a Tory party spokesman said Mr Soley's intervention was 'just another Labour smear. We have never received any money from the Saudi government or Saudi Royal Family directly or indirectly.'
The latest dramatic turn in the funding crisis comes as Mr Heseltine is recovering in a Venice hospital from a heart attack.
Earlier in the Commons, Labour had accused the Government of 'corruption and sleaze' for allegedly selling political favours in return for party funds.
Angry exchanges came after a move by liquidators of Asil Nadir's business affairs who took the first steps to recover some of the pounds 440,000 he donated to the Tories. Sir Norman criticised Touche Ross, the accountants winding up Polly Peck, for waiting more than 600 days before asking for the money, and made it clear it would be repaid only if there was proof it had been stolen.
In the Commons, with both sides indulging in mudslinging, Margaret Beckett, Labour Party deputy leader, spoke of the 'atmosphere of sleaze and odour of corruption' surrounding the Tory party.
David Hunt, Secretary of State for Employment, strongly defended the Government, although all but one of the Cabinet were absent. He called Labour 'the party of nudge nudge, wink wink; the party of innuendo', telling Mrs Beckett her speech had been a 'travesty and a disgrace'.
Labour's deputy leader delivered the most sustained assault on the party and its connections with British backers and foreign donors seen since the Tories came to power. Labour MPs believe some mud will stick.
Mr Major's advisers were determined that the Government should weather the storm over the Nadir affair, although senior Tory backbenchers warned that if he did not ask Michael Mates to resign, the Minister of State for Northern Ireland would be humiliated at the meeting of the 1922 Committee of Tory MPs tomorrow.
Mrs Beckett told MPs: 'This is a Government that has ceased to be able to tell the difference between the country's interests and its own - perhaps even ceased to believe that one can be distinguished from the other.'
Mr Hunt waved a lavender-coloured list as a reminder of political favours bestowed by Lord Wilson of Rievaulx, the Labour prime minister, in his resignation honours list.
Sir Norman said there was overwhelming public opinion against state party funding. However, Tory MPs privately believe the party will be forced to be more transparent.Reuse content