Cabinet ministers 'consulted about party loans'

Cabinet members were consulted about multi-million pound loans from four businessmen who Tony Blair later nominated for peerages, the cash-for-honours inquiry has been told.

The claims are understood to be the main reason that detectives from Scotland Yard contacted every cabinet member - apart from the Prime Minister - to question them over whether they had any knowledge of the allegedly corrupt loans deal.

The police plan to interview Mr Blair in the next few weeks about the allegation that peerages were, in effect, sold by Labour, a senior Whitehall source has confirmed. According to the source, the unresolved "million dollar" question is whether the Prime Minister will be interviewed under caution - which would mean he is being treated as a suspect - or merely as a witness.

The investigation, which is due to be presented to the Crown Prosecution Service in January - which will then decide whether anyone will face a criminal charge - is the first major political corruption inquiry for more than 70 years.

The source said: "As part of the investigation, the police were told that there was wide consultation among the Cabinet about the loans, which clearly has to be checked out."

As a result of that allegation, all members of the Cabinet - apart from Mr Blair and Lord Goldsmith, the Attorney General - were sent letters asking them for information and asking them to declare in writing what they knew, or did not know, about the loans.At least three people have so far been arrested, including the Prime Minister's principal fundraiser, Lord Levy.

The first person to be arrested in the inquiry, Des Smith, a headteacher, reported to police on bail yesterday and was told to return at a later date. Mr Smith, 60, was arrested in April after he allegedly told a reporter that businessmen who sponsored city academies could earn knighthoods and peerages.

A Scotland Yard unit, headed by Assistant Commissioner John Yates, intends to question Mr Blair before Christmas. Downing Street is pressing for Mr Blair to be called as a witness, rather than under caution.

The investigation has centred on four Labour donors nominated for peerages after making secret substantial loans to the party before the 2005 election. All of the appointments were blocked by the House of Lords Appointments Commission. Labour disclosed earlier this year that 12 businessmen had lent it £14m prior to last year's general election. Under election rules, the loans did not have to be made public. The police investigation is examining whether there were breaches of the Honours (Prevention of Abuses) Act 1925, which makes it an offence to take money as an "inducement or reward'' for procuring an honour.

It is also looking at possible breaches of the Political Parties, Elections and Referendums Act 2000, which limits the sources of donations to political parties. It also prohibits the concealment of donations by presenting them as loans.