Mr Sarwar has admitted handing over pounds 5,000 to Islam Badar, but argued that the money was a loan given after the election. He plans to take legal action against the News of the World over claims made in an article last Sunday.
The party's National Executive Committee met yesterday and said that a panel of three of its members would investigate and "leave no stone unturned."
Labour's general secretary, Tom Sawyer, announced the move after the meeting. "We will not hesitate to take action, however, tough, if there is any proof of corruption, abuse or wrongdoing. As Tony Blair said this morning, we were elected to introduce higher standards and we will uphold higher standards," he said.
Mr Sarwar said he "fully understood" the need for an inquiry and welcomed it. In a statement, the cash-and-carry millionaire echoed Mr Blair's commitment to higher standards in politics and insisted once again that the newspaper allegations were "totally false".
None the less, Mr Sarwar's prospects of hanging on as Britain's first muslim MP look bleak. His supporters in the fractious Govan Labour Party have begun to flake away, while the less committed hope he will resign by the weekend and let them prepare for the by-election they believe inevitable.
"The coalition of Sarwar people, left activists and ordinary members in Govan is disintegrating by the hour," a party source said. "This is a tragedy not just for Sarwar, but for people who have given years of work for the Govan party. It has all turned to ashes in two weeks."
One member of the panel will be Alan Johnson, former general secretary of the Union of Communication Workers and now MP for Hull West and Hessle. The investigation will begin immediately and run parallel to the police investigation.Reuse content