A former education adviser was today arrested by police investigating claims that honours have been "sold" by political parties, sources said.
He was named as Des Smith, a headteacher in Dagenham, as the individual detained by the Specialist Crime Directorate this morning for an offence under the Honours (Prevention of Abuses) Act 1925.
Mr Smith sparked a sleaze row earlier this year when he suggested wealthy donors were offered honours in exchange for funding the Government's flagship city academy programme.
The Scotland Yard inquiry was originally launched in response to a complaint by Scottish and Welsh nationalist MPs that Labour had broken the law outlawing the sale of honours such as peerages and knighthoods.
It has since been widened to cover the activities of other parties.
Mr Smith quit as a member of the governing council of the Specialist Schools and Academies Trust (SSAT), the body that helps recruit sponsors for academies, after comments made to an undercover reporter were published by the Sunday Times in January.
He was an adviser to the Trust's chair Sir Cyril Taylor.
Afterwards Mr Smith, who is head of All Saints Catholic School and Technology College, apologised for his comments and admitted he was naive.
He told the reporter that large gifts to one or two of the schools might win an OBE, CBE or knighthood, while a peerage would be "a certainty" for giving to five.
Up to eight academy sponsors who have made gifts since the controversial programme to establish 200 academies was launched in 2001 have been honoured under Labour.
Academies are funded directly from Whitehall, bypassing local education authorities, and donors are given an input into their running in return for gifts usually amounting to about £2 million.
The Sunday Times reported that Mr Smith told a journalist posing as a potential donor's PR assistant that "the Prime Minister's office would recommend someone like (the donor) for an OBE, a CBE or a knighthood"'.
Asked if this would be just for getting involved in the academies, he responded: "'Yes ... they call them 'services to education'. I would say to Cyril's office that we've got to start writing to the Prime Minister's office."
For a donation of £10 million, "you could go to the House of Lords"', he said.
However, when confronted by the paper, Mr Smith responded that it was "not possible" to acquire an honour in return for donations.
And Sir Cyril told the paper: "In no way is giving money to the academy linked to the award of an honour."
Downing Street and the SSAT rejected the reports at the time as "nonsense".
Number 10 would not comment on today's arrest, saying it was "a matter for the Metropolitan Police".
Scottish National Party MP Angus MacNeil - who with Welsh nationalists, made the initial complaint that sparked the police probe - said he was glad action was being taken.
"I am pleased to hear that the Metropolitan Police are having success. This arrest marks the beginning of the clean up of politics at Westminster.
"Corruption has no place in politics in any advanced western democracy.
"Whether it's loans or donations being offered, the prize should never be a seat in the legislative body.
"I hope this investigation goes the whole way in cleaning up parliament."
Plaid Cymru leader Elfyn Llwyd said: "Today's arrest not only shows the severity of the scandal and how seriously the Metropolitan Police are taking the issue, but also shows there must be evidence of wrongdoing.
"Political parties must be open and transparent to ensure the public have faith in their actions.
"There is no space for corruption or criminality in politics - no politician, political party or official can ignore the law, and those who draft legislation should know that better than anyone."
The investigation is being led by Deputy Assistant Commissioner John Yates.
It followed reports that the House of Lords Appointments Commission had blocked the appointment of four of Prime Minister Tony Blair's nominations for peerages - all wealthy businessmen who had made loans to Labour.
Taking millions of pounds in loans to fund their election campaigns enabled both main parties to keep the cash off public lists of donations - a practice they have pledged to stop.
None were on the list of new working life peers when it was published on Monday.
One Tory nominee - who had loaned the party £2 million - also missed out on a seat in the upper house.
Mr Yates has indicated he was prepared to widen the investigation to consider more general allegations of corruption.
A number of other inquiries - by MPs and democracy watchdog the Electoral Commission - have been put on hold while the police investigate.