Baroness Warsi faced calls last night to stand down as the Conservative Party co-chairman following allegations she claimed expenses while staying rent-free at a friend's house.
Lady Warsi insisted she had made the claim correctly and had passed the money on to her friend.
But Labour demanded a full inquiry into the accusations and a former Westminster sleaze watchdog suggested she would have to quit until her name was cleared. Lady Warsi received only lukewarm support from Downing Street and the Tory hierarchy. The party's deputy chairman, Michael Fallon, said that she believed she acted within the "spirit and letter" of the rules, but admitted the episode was embarrassing for the party.
The controversy centres on allowances Lady Warsi received in 2008 for nights spent at a property in Acton, west London. At the time, peers living outside the capital were allowed to claim up to £165.50 subsistence a night when they stayed in London.
Lady Warsi said she made an "appropriate payment" to a friend, Naweed Khan, who was renting the house, to cover her time there. Mr Khan is her special adviser. He confirmed she had "made a financial payment on each occasion". But the property's owner, Wafik Moustafa, denied receiving any income from either Lady Warsi or Mr Khan. Sir Alistair Graham, the former chairman of the Committee on Standards in Public Life, told Sky News she should step aside until she had been cleared: "When a minister is faced with very serious allegations, it's better that they stand down while that investigation takes place."
Sir Alistair said peers had recently been jailed for false expenses claims and added there could be a complaint to the Metropolitan Police in this instance. Initially the case is likely to be considered by the Lords Commissioner for Standards, Paul Kernaghan.
In a statement, Lady Warsi said: "There was a period of around six weeks when I spent occasional nights at a flat in Acton, which was occupied by Naweed Khan. For the nights I stayed as a guest of Naweed Khan, I made an appropriate financial payment equivalent to what I was paying at the time in hotel costs."