Ed Miliband has called for a strict £5,000-a-year limit on individual donations to political parties, in a move which he said could cost Labour millions of pounds in lost money from the trade unions.
But his proposal was immediately ridiculed by the Conservatives as "virtually meaningless" because Labour would retain the cash it received from the levy on trade-union members.
Mr Miliband sought to seize the initiative on the long-deadlocked issue of party funding and to exploit the Tories' difficulties over boasts by a former fundraiser that he could secure access to David Cameron in return for large donations.
The episode led to the resignation of Peter Cruddas after he was caught on tape making the claims, and to the re-establishment by Nick Clegg, the Deputy Prime Minister, of all-party talks on funding.
Previous efforts to strike a deal have foundered after Labour defended its financial reliance on the big unions while the Tories strongly opposed any suggestion of a cap below £50,000. The funding talks resumed last week but have been given fresh impetus by Mr Miliband's intervention.
The Labour leader wrote on his website: "At a time when politics is seen as being disconnected from most people's lives, the public need to know that their elected leaders are not just listening to those who can pay. So I believe it is time now for real change: it is time to take the big money out of politics. I am determined this opportunity to bring about that change is not wasted."
Mr Miliband said the £5,000 ceiling should be combined with a much lower limit on the amount parties are allowed to spend on campaigning, as well as a fresh look at how public money is allocated to the parties.
He acknowledged that his proposal would mean Labour forfeiting large donations, mainly from trade unions, in the run-up to an election. But he made clear he supported the retention of the political levy, under which union members automatically pay £3 a year to Labour unless they choose to opt out of the system.
His insistence will prove a key sticking point in negotiations with the Tories and Liberal Democrats, who protest that he is stacking the cards heavily in his party's favour.
A Conservative spokesman said Mr Miliband's move was "virtually meaningless" as it would apply only to donations to Labour from unions' central funds and would exempt income from members' subs.
The Housing minister, Grant Shapps, said Labour would lose only 1 per cent of its funding, apart from in an election year. He added: "We are very, very keen to reform party funding. It's the unions that have been blocking it and, of course, funding the Labour leader."
A senior Labour source disputed the Tory accusation, saying Labour would have forfeited more than £14m over the past three years, including £9m in the election year of 2010, under the plan.
A spokesman for the Unite union said it backed Mr Miliband's effort to "restore faith in politics, and is pleased that the vital link between Labour and millions of working people is valued and will be retained".
What's on the table
Size of donations
The Tories favour a £50,000 annual limit on individual donations. Nick Clegg backs £10,000. Ed Miliband has now proposed £5,000.
Union members have to "opt out" if they do not want £3 a year going to Labour. Both the Liberal Democrats and the Tories support an "opt-in" system.
Parties can spend £19m in an election campaign. Mr Miliband wants a lower limit. Mr Clegg is sympathetic.
Last year, the Kelly Report suggested giving the parties £23m more per year to compensate for lost income. The parties would love that, but fear it is impossible in austere times. Other subsidies could be reallocated: free postage at elections is worth £28m alone. Mr Clegg and Mr Miliband are open to this.
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