The Prime Minister ratcheted up the pressure on a colleague under fire by demanding an early copy of the internal report into whether Dr Fox's links with his friend Adam Werritty broke the ministerial code.
The Independent on Sunday has learnt that the Ministry of Defence investigation will focus on business deals secured by Mr Werritty, amid concerns that the department would be embarrassed if the consultant has been working for clients deemed to be "undesirable" by the international community.
"This man appears to have been involved in arms contracts all over the place," a senior MoD official said last night. "If he has been involved with less favourable regimes, even if they are perfectly legal, it would be hugely embarrassing for the minister."
Officials have also been told to investigate claims that Dr Fox left civil servants and his security detail behind when he went to a business meeting with Mr Werritty and businessmen in Dubai.
This newspaper has also learnt that Mr Werritty – who has no official Whitehall security pass – may have been given the freedom to roam around Dr Fox's private quarters at Admiralty Arch, where other ministers have apartments.
The Defence Secretary's predicament deteriorated further yesterday when a Labour MP reported him to the standards watchdog over the revelation that he had allowed Mr Werritty to stay rent-free in his taxpayer-funded flat almost 10 years ago. The Shadow Defence Secretary Jim Murphy also claimed Dr Fox had misled him when he gave a private assurance that the Dubai meeting was above board.
But it was the Prime Minister's intervention that sparked the most dramatic downturn in Dr Fox's fortunes, as it suggested that Mr Cameron no longer has complete confidence in his colleague's ability to ride out the crisis.
Dr Fox was plunged into difficulties after it emerged that, contrary to previous assertions, Mr Werritty had visited him at the MoD on several occasions and turned up on at least two of his overseas trips. It was claimed yesterday that Dr Fox had attended a business meeting arranged by the consultant, who carries business cards declaring that he is the Defence Secretary's adviser.
Someone familiar with Mr Werritty's modus operandi told The IoS last night: "He is the sort of person who is very useful to someone trying to increase British exports... He can whip out his card and say, 'HMG is behind this deal', and that impresses a lot of the countries to whom we are trying to sell and increases the status of the deal.
"So he is trading on his association with Fox, while also doing something for the good of the UK. I don't know if he would be on a commission, but normally the rate for this sort of deal would be 5 per cent."
Dr Fox last week asked the MoD's top civil servant, Ursula Brennan, to investigate "baseless allegations" that sensitive information could have been exposed during his former flatmate's visits.
But No 10 announced last night that Mr Cameron has now asked the Cabinet Secretary, Sir Gus O'Donnell, to examine the report. The move effectively takes the decision over Dr Fox's fate out of his own hands.
"There is no reason why we need to delay with getting the initial findings to the Cabinet Secretary; it would be silly to delay," a No 10 aideexplained last night. "The PMremains supportive of Liam. There is no point hanging around."
Dr Fox, who was visiting Libya yesterday, claimed he had agreed to the Dubai meeting with the businessmen "when they happened to be sitting at a nearby table in a restaurant".
He said: "It's not that unusual. But these questions are reasonable questions for people to ask and I don't mind that. That is what you get in a democratic society."
But, as Labour pledged to maintain its assault over the issue, several government sources raised questions over his ability to survive the crisis. "If the business side of things becomes more complicated, it will become difficult for him," a close colleague of Dr Fox said.
A senior Downing Street source said: "It is difficult to know who is going to go first – Fox, [Chris] Huhne or [Ken] Clarke. If we were having a reshuffle, we would get rid of him."
Dr Fox's position came under fresh attack last night, as The Observer revealed the existence of a film showing Mr Werritty meeting the President of Sri Lanka with the Defence Secretary in a London hotel last year, despite having no role in government.
The paper also claimed emails between Mr Werritty and the businessman Harvey Boulter, obtained by The Guardian in August, appeared to contradict Mr Fox's claim that the Dubai meeting was arranged on the hoof. They appear to indicate that Mr Werritty had been trying to fix up such a meeting since April.
Jim Murphy, who is calling for a more extensive inquiry into the affair, last night increased the pressure on Dr Fox by accusing him of not telling the truth about the highly sensitive meeting in Dubai.
In an article for the Mail on Sunday, Mr Murphy said that Dr Fox had given him a personal assurance that the meeting was in line with departmental protocols, and that a senior MoD official had been present throughout.
But Mr Murphy claimed that he later discovered that the meeting was brokered and attended by Mr Werritty – and that no MoD officials were present.
He said: "The two accounts could not possibly both be true."
"An inquiry is important, but so too are direct answers.
"There are accusations mounting. It is time for the avoidance to stop and for the answers to start."
The questions that need answering
What was discussed at meetings where Adam Werritty was present? Highly sensitive information could be valuable to the defence industry or threaten national security.
How many times has Mr Werritty set up meetings with Dr Fox? It seems unlikely that the Dubai meeting on 16 June was the only time he brokered talks with outsiders.
Did anyone ever raise concerns about Mr Werritty's conduct? If Dr Fox ignored warnings it could be difficult to defend.
What access did Mr Werritty have to MoD documents, intelligence, staff and the minister's official residence? He is not an employee and had not been security cleared.
What was in it for Mr Werritty? Any suggestion of financial gain would be fatal for Dr Fox.
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