The Crown Prosecution Service has said there would be no let up in the "cash-for-honours" investigation despite a decision to drop inquiries against the first person to be arrested in the case.
The decision not to prosecute Des Smith, a fund-raiser for Tony Blair's flagship city academies, on grounds of " insufficient evidence" came as a short-lived respite to the Prime Minister. "The wider police investigation continues," the Crown Prosecution Service (CPS) said yesterday.
Mr Blair has been warned by colleagues that he would be expected to quit to clear his name if any of his staff were charged. Two of Mr Blair's close allies - Ruth Turner, his "gatekeeper" in Downing Street, and Lord Levy, the Labour Party's chief fundraiser - have already been arrested on suspicion of perverting the course of justice.
The Prime Minister's chief of staff, Jonathan Powell, could be the next to be interviewed by the Metropolitan Police, who are now focusing on allegations of cover-up inside No 10.
The CPS said there was not enough evidence to charge Mr Smith, who was arrested after it was reported that he told an undercover newspaper journalist that sponsors who gave millions of pounds to the schools could expect honours. His lawyers, who said he categorically denied the claims, were informed by Scotland Yard that there was insufficient evidence to charge him with an offence under the Honours (Prevention of Abuses) Act 1925.
"Although it is clear that Mr Smith made some indiscreet comments to an undercover journalist, his conversations did not provide evidence that he was trying to obtain funding for city academies in exchange for honours," said the CPS.
Scotland Yard said: "The wider police investigation is ongoing and as a result there will be no further police comment at this stage."
Mr Smith said: "It's just been going for so long. I'm relieved that it's over. It was nonsense from the beginning." He refused to comment on whether the charge meant others caught up in the affair may not face honours charges.
Gus O'Donnell, the Cabinet Secretary, told the Commons Public Administration Committee yesterday that Downing Street was "complying fully" with police requests, and he dismissed reports of a hidden email system within No 10.