The Lord Chancellor is proposing a change in the law which would make it illegal for political loans to remain secret, it emerged today.
Lord Falconer is writing to all parties suggesting a ban be included in a Bill already going through Parliament.
A spokeswoman for the Department for Constitutional Affairs said: "He is going to propose that there will be some legislation."
The move is the latest development in the wake of the "loans for peerages" row which has dogged Labour over recent days.
It comes as Tory leader David Cameron sets out plans today for the number of MPs to be cut by 10% to free up cash for more state funding for parties.
Lord Falconer said today on the BBC Radio 4 Today programme: "The problem here is about the way political parties are funded. That's been a problem for decades.
"The idea that this is some new problem that has suddenly emerged is wrong. The problem is not a group of people in 10 Downing Street. The problem is about how we fund political parties."
He added: "The difficulty is that there is not a transparency as far as the public is concerned and that needs to be dealt with and dealt with urgently.
"I think it is important that we make sure that there are proper protections in place. That's why we are proposing today that we use the Bill that is going through Parliament in order to amend the law about loans."
Challenged over whether the Government would be changing the law if party treasurer Jack Dromey had not made his dramatic revelations last week, Lord Falconer accepted: "I don't think we would be doing it if it had not become public."
Labour is battling to persuade voters it has not "sold" peerages.
Commons leader Geoff Hoon conceded yesterday that people thought the party had handed out peerages for cash.
Deputy Prime Minister John Prescott insisted there was no evidence that seats in the Lords were offered for loans, despite earlier refusing to give a cast-iron guarantee that they were not.
The Labour high command was speaking after polls indicated Tony Blair's standing had plummeted to an all-time low following the row.
In another funding revelation Labour minister Lord Sainsbury last night confirmed he had lent the party £2 million.
The peer - a minister at the Department of Trade and Industry - made the loan last year on commercial terms.
He said he informed the permanent secretary at the DTI at the time in accordance with ministerial rules.
And a fourth wealthy Labour donor reported to have had his nomination for a peerage blocked, said party officials told him to keep his loan secret.
Reports say the body that vets potential peerages is withdrawing its endorsement of curry magnate Sir Gulam Noon because neither he nor the party disclosed his loan of up to £250,000.
But he told The Times he was specifically instructed not to mention the loan because it was refundable and therefore circumvented funding rules.
Mr Cameron meanwhile said his proposals would enable political parties to be less reliant on wealthy individuals.
He wants to limit the size of donations from individuals, businesses and trades unions and would also like the amount of money parties can spend in a general election campaign cut from £20 million to £15 million.
Liberal Democrat leader Sir Menzies Campbell said it appeared there was a "link" between individuals giving to political parties and subsequent preferment.
Sir Menzies said that his party had not nominated anyone for a peerage who had loaned it large sums.
The Lib Dems received loans from three people in the period before the General Election and have declared their names and the sums lent, he said.
Sir Menzies called for "transparency, transparency, transparency" and said that this should apply not only to future loans but to sums already accepted by parties.
The argument that past lenders must not be identified if they were given promises of confidentiality at the time of their loan was "blown away" by the scale of the current controversy, he said.
Mr Blair has already accepted personal responsibility for the affair, he pointed out.
"Have peerages been sold? Not perhaps in the sense that Lloyd George did," he said on the Today programme.
"But I think there has been a link between generosity and preferment, and whenever a link of that kind is established then that is bound to raise suspicions in the minds of the general public and, more particularly, in the minds of MPs and members of the House of Lords."
He added: "Transparency is so important... Otherwise the continued disconnection between the public and politicians will, if anything, be made even greater."
Lib Dems are backing a £50,000 cap on donations by individuals and a reduction in maximum election spending from £20 million to £15 million, along with "limited" state funding for parties, he said.
Education Minister Lord Adonis - a former member of Mr Blair's inner circle at 10 Downing Street - told the Today programme: "We have nothing to hide, we have behaved entirely properly and, as Lord Falconer will set out later, we are going to respond to the current concerns."
He insisted the row was not distracting ministers from their jobs.
And he added: "I think the Prime Minister gave a very full account last week of the position and Lord Falconer will be setting it out more fully later.
"The Prime Minister is a servant of the Labour Party, like any other member, but his constant concern has been that we are in a position to implement our programme."Reuse content