Bitter row over terms of banking inquiry ends with Labour retreat

George Osborne repeatedly clashed with Labour's Ed Balls (PA)

Bankers involved in the interest rate rigging scandal could be questioned by a QC as well as MPs and Lords as part of a joint Parliamentary inquiry agreed yesterday.

After a heated and at times ill-tempered debate in the Commons, Labour backed down after losing a vote on a full public inquiry and agreed to work with the Government on a more limited investigation into the manipulation of the Libor rate.

However, in an apparent concession the Leader of the House, Sir George Young, agreed to provide the inquiry with the services of senior legal counsel. Government sources later confirmed that it was possible that this could result in a QC asking questions in a similar role to that of Robert Jay in the Leveson Inquiry.

Members of the Treasury Select Committee who questioned Bob Diamond on Wednesday had been criticised for the lack of forensic examination of the former Barclays chief executive.

Details of the new investigation will now be hammered out between the main parties in the next few days. "We've got to sit down with the opposition and establish how this will work," a Government source said. "There is a lot to do."

The development came after Labour lost a vote to hold a full public inquiry by a sizeable majority. Afterwards the shadow Chancellor, Ed Balls, said Labour would accept the limited Parliamentary inquiry but added it believed the case for a "full, open judge-led public inquiry" was still necessary and it would "continue to press that case". "The Prime Minister and the Chancellor have made a very grave error of judgement," he said.

Before the vote Mr Balls and the Chancellor, George Osborne, were involved in what, even by Parliamentary standards, were particularly ugly exchanges. The pair clashed repeatedly over Mr Osborne's suggestions that the shadow Chancellor had known about the interest-rate fixing scandal when in office.

Mr Balls denied any involvement and claimed Mr Osborne's conduct "demeaned" the office of Chancellor. "The cheap and partisan and desperate way in which you and your aides have conducted yourselves in recent days does you no good, it demeans the office you hold and most important it makes it harder to achieve the lasting consensus we need," he said.

Mr Balls called on him to withdraw the "false, personal accusations" which were made "purely in the hope of political advantage". But Mr Osborne hit back telling him: "The idea that I am going to take lessons in integrity from the man who smeared his way through 13 years of Labour government, who half the people who ever served with him think was a disgrace in his post, is another thing."

He called on Mr Balls to "explain what Labour's involvement was, who were the ministers?; who had the conversation?; who were the senior figures?" and said he had to "answer for his time in office".