The Secretary of State for Scotland, Donald Dewar, called in the police yesterday afternoon to investigate the allegation against Mohammed Sarwar, MP for Glasgow Govan.
Mr Sarwar, who strongly denies the claim was forced to fly to London yesterday to explain himself to the party's Chief Whip, Nick Brown.
After the meeting, Mr Sarwar, Britain's first Muslim MP, issued a statement following reports in the News of the World and other newspapers that he had paid pounds 5000 to Independent Labour candidate Badar Islam.
"The allegations made about me in today's newspapers are totally false. Therefore, in addition to co-operating with any police investigation, I will be consulting with my lawyers about taking out a writ for defamation," he said.
Mr Brown said that he would take no immediate disciplinary action, but would ask the party's National Executive Committee to decide whether it should report separately on the matter.
Labour sources were anxious to be seen to be taking a tough stance yesterday. During the general election, the party was critical of John Major for not forcing Neil Hamilton to stand down, suggesting that Tony Blair would have shown stronger leadership.
The Home Secretary, Jack Straw, said that if the allegations were proven there would be serious consequences.
"We made it clear before the election that we take such matters very seriously indeed and serious actions will flow if these allegations are found to be substantiated," he said on BBC television.
The News of the World claimed that Mr Sarwar twice asked Mr Islam to help him. Before the election he tried to persuade him to wind down his campaign, it said. He had promised "compensation," but no sum was mentioned.
After the election, the MP was at the centre of allegations of ballot- rigging made by a Scottish Unofficial Labour candidate, Peter Paton - a matter already under police investigation. The paper said he then gave Mr Islam pounds 5,000 in cash - handed over during a meeting in a Mercedes - to discredit Mr Paton.
Almost from the moment he signalled his intention to become an MP, Mr Sarwar, the millionaire owner of a cash-and-carry business, has been at the centre of controversy. His selection for the Govan candidacy followed a bitter battle with Mike Watson, the former Labour MP. Mr Watson had won the selection ballot by a single vote but was defeated by Mr Sarwar after Labour party bosses ordered a re-run following claims that some votes had been unfairly discounted.
Mr Sarwar was accused by sections of the Muslim community of bringing "shame on Islam" last year after a high-profile trip to Pakistan to "rescue" two Glasgow girls from forced marriages.
In the election Mr Sarwar held the seat for Labour with a 2,914 majority over Scottish National Party candidate Nicola Sturgeon, while Mr Islam polled 319 votes.
The Scottish National Party leader, Alex Salmond, wrote to the Prime Minister yesterday calling for "prompt and decisive action" over the allegations - a phrase used by Mr Blair about Neil Hamilton. "I presume that you will take such prompt and decisive action now in relation to the allegations ... " he said.
Bribery is an offence under the 1983 Representation of the People Act, and anyone found guilty of it can be fined up to pounds 5,000 and barred from public office. A disciplinary code accepted by the Parliamentary Labour Party before the election includes an offence of bringing the party into disrepute, for which an offender could be expelled from the party.