The Tories claimed there was a conflict of interest because Lord Sainsbury, a passionate advocate of genetically modified crops and foods, was in a position to influence policy on one of the most sensitive issues facing the Government.
Lord Sainsbury, former chairman of the supermarket chain, gave Labour pounds 2m before the 1997 general election. The party was thrown on to the defensive last night over his new donation, and appeared surprised by the controversy it provoked.
The code of conduct for ministers says they "must ensure that no conflict arises, or appears to arise, between their public duties and their private interests".
Lord Sainsbury's shares in the family firm, and those in a company that possessed the patent rights to a key gene used in the GM process, were put into a blind trust when he became a minister. The Government insists he plays no part in formulating policy on the issue.
But the Tories are to demand an investigation into whether Lord Sainsbury has breached the ministerial rules. "Lord Sainsbury should now resign," John Redwood, the shadow Environment Secretary, said. "Either someone helps a political party by giving large donations to it, or helps on policy and can serve as a minister. You cannot do both - especially if you have investments in the area of your ministerial responsibilities."
Bob Marshall-Andrews, Labour MP for Medway, described the donation as a dangerous development. He said: "When someone is the recipient of such massive patronage and also a donor of massive funds, then that obviously affects a perception of democracy. That is what is so corrosive and damaging."
Downing Street said Tony Blair had not discussed the donation with Lord Sainsbury, who does not draw a ministerial salary. A spokesman did not know whether the gift had been brought to the Prime Minister's attention.
The row was embarrassing for Labour, which has attacked the dependency of the Tories on their treasurer, Michael Ashcroft, a businessman and tax exile. The Tories say he provides 10 per cent of their funds; Lord Sainsbury will now provide a similar slice of Labour's income.
Labour sources insisted they had nothing to be embarrassed about and welcomed one of the biggest single donations to party funds. They suggested that wealthy ministers had given money to the Tories while the party was in power, and contrasted the secrecy of these gifts with Lord Sainsbury's openness.
Lord Sainsbury said: "As a minister I am more than ready for it to be a matter of public record how much money I give to the Labour Party."
The storm overshadowed the publication of Labour's accounts, which showed the party had turned round its finances, wiping out a deficit of pounds 4.5m and making a surplus of the same amount - the largest in its history.
But Labour's annual report admitted: "Our financial position remains fragile." Party membership dropped from 405,238 to 387,776 last year, and a further fall is expected this year.
Labour argued that it was now Britain's most broadly based political party, with 40 per cent of its annual income, or pounds 8m, coming from small donations from Labour members, 30 per cent from trade unions, 20 per cent from big donations of more than pounds 1,000, and 10 per cent from sponsorship.
The report listed the 45 donors who gave the party more than pounds 5,000 last year. They included Greg Dyke, the incoming director general of the BBC; Gerry Robinson, the chairman of Granada, who was appointed chairman of the Arts Council by the Government; Neil Tennant, singer with the Pet Shop Boys; John Reid, the former manager of Elton John; Baroness Rendell, the crime author who was made a life peer by Labour; and her fellow peers Lord Hamlyn, the publisher, and Lord Haskins, the chairman of Northern Foods, who heads a government task force on red tape.
Lobbyists and public relations firms who bought tickets for Labour fund- raising events at a cost of more than pounds 5,000 included Brunswick, Grandfield, and Lawson Lucas Mendelsohn.
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