George Osborne feels the pain of dominatrix's claims

Chancellor accused of repaying favour by backing Coulson for No 10 job

George Osborne faced more questions yesterday about his role in the decision to bring the former News of the World editor Andy Coulson into the heart of the Conservative Party. It followed new claims about the newspaper's treatment of a story linking the Chancellor to a former dominatrix and allegations of drug-taking.

The Independent revealed last month that Natalie Rowe, who once ran the Black Beauties escort agency offering prostitutes for £350 per hour, had been targeted by the NOTW's private detective Glenn Mulcaire before the publication of a story in the middle of the last Tory leadership contest about Mr Osborne's friendship with the former vice madam.

A lawyer for Ms Rowe, who is suing Rupert Murdoch's News International for damages over Mr Mulcaire's activities, said the treatment of her story by Mr Coulson, the then editor of the NOTW, may have had an effect on his subsequent recruitment to Conservative Central Office in 2007, with Mr Osborne's active encouragement.

Mark Lewis, one of the leading lawyers bringing phone-hacking claims, pointed out that Mr Coulson had authorised the publication of an editorial putting a positive spin on the 2005 story about Mr Osborne, which claimed he had attended parties where cocaine was widely used. The Chancellor, who was photographed with his arm around Ms Rowe in front of what was reported to be a line of cocaine, has always strongly refuted suggestions that he took drugs.

He played a key role in the decision to recruit Mr Coulson as David Cameron's spin-doctor in the summer of 2007, shortly after the tabloid editor resigned over the hacking scandal at the paper. He subsequently entered No 10 as Mr Cameron's communications chief before resigning earlier this year.

Mr Cameron and Mr Osborne have since said they regret hiring the former journalist, who was arrested in July on suspicion of conspiring to hack phones and making corrupt payments to police.

In an interview with the Australian state broadcaster ABC yesterday, Ms Rowe repeated her claim that Mr Osborne took drugs with her at parties in the early 1990s, when she was dating one of the future Chancellor's friends from Oxford University. Mr Osborne, then in his early 20s, was working as a freelance journalist but soon afterwards began his political career as a Conservative Central Office researcher.

When the NOTW and Sunday Mirror published stories in October 2005 revealing the links between Ms Rowe and Mr Osborne, the then Shadow Chancellor, he dismissed the claims as "defamatory and untrue" and said the dominatrix was at most a casual acquaintance.

Ms Rowe, who said she was "more than friends" with Mr Osborne, told ABC: "I've always said that the truth will always catch up on you. And it's going to catch up on him."

The NOTW article, which Ms Rowe claimed had been published despite her pulling out of a deal to sell her story to the now-defunct Sunday tabloid, carried an editorial stating that Mr Osborne had been a young man caught up in a louche social scene. It noted his strong stance on drug use, saying: "[He] robustly condemns drugs for the destruction they wreak."

The story and positive editorial came at a crucial time in Mr Cameron's 2005 party leadership bid, managed by Mr Osborne. Both men faced repeated questions about whether they ever took drugs, but the issue failed to derail Mr Cameron after other contenders said such claims were irrelevant.

The lawyer Mark Lewis said: "That editorial could have gone completely the other way. It could have said, for example, whilst we do not believe George Osborne took drugs, he showed a serious error of judgment being at the party or being at the flat where drugs were taken ... He showed that error of judgment and therefore he is not right to be in the heart of politics. Now the decision on which spin to give to the story by the editor of the Notw particularly was something that determined his future in politics."

A spokesman for Mr Osborne said last night: "These are old allegations that were widely reported and denied years ago. There is nothing new."

In 2005, he insisted he only knew Ms Rowe through his friend William Sinclair, who had a child with her and was treated for drug addiction with Mr Osborne's help. Mr Osborne said: "That is, and always has been, the sum total of my connection with this woman. It was a stark lesson to me at a young age of the destruction which drugs bring to so many people's lives."