Electoral watchdog warns of legal action over funding

The Electoral Commission is threatening court action against Labour, the Tories and the Liberal Democrats to force them to give details of the loans they have received from their millionaire backers.

The public watchdog on the election rules is demanding the full disclosure of the terms on which the loans were given. Sam Younger, the commission chairman, has made it clear that "soft" loans could breach the rules on party funding. If preferential rates of interest were being charged, or the money was never expected to be repaid, the funding would have counted as a donation. One Tory lender this week announced his £2m loan could be taken as a gift.

The two main parties spent £42m on the last election. Labour disclosed the names of 12 lenders who provided £13.9m in loans.

The commission said they were not being open enough with their funding, and demanded more information about the loans.

The commission's warning increased the pressure on the Conservative leader, David Cameron, to release the names of Tory supporters who gave millions of pounds in loans to fight the last election. Mr Cameron has been urging the lenders to allow their names to be published, but most have refused.

The commission decided to get tough after Chai Patel, the head of the Priory clinics, revealed that he was asked by Lord Levy, Labour's chief fundraiser, to make a loan to the party, rather than a straight donation.

The Prime Minister is facing a further challenge by the Tories over his failure to tell the Lords Appointments Committee that four of the people he nominated for peerages had given loans to Labour. A senior Conservative source revealed last night that they had checked on the letter sent to the peerages committee by David Maclean, then the Tory chief whip. Mr Maclean volunteered the information on the loans, leaving Mr Blair more vulnerable to the charge of concealing information from the anti-sleaze committee.