Constitutional affairs minister Harriet Harman today gave up her responsibilities for overseeing electoral and House of Lords reform - after her husband, Labour treasurer Jack Dromey, called for an inquiry into the "cash for peerages" row.
A spokesman for the Department for Constitutional Affairs said: "Ms Harman was the one who asked to be relieved of the responsibility for electoral administration to make sure that there wasn't any conflict of interest."
Mr Dromey shocked Labour by last night revealing he and other elected party officials had been "kept in the dark" about the loans from wealthy individuals, which ran into millions of pounds.
He indicated he was ready to demand answers from Prime Minister Tony Blair. Number 10 must have known about the money and had not "sufficiently respected" Labour Party institutions, including its ruling National Executive Committee, he said.
Mr Dromey also called on sleaze watchdogs from the Electoral Commission to look into the propriety of party's accepting loans from non-commercial sources.Labour last night insisted that it had "fully complied" with the Commission's rules on fund-raising.
Mr Dromey, who is deputy general secretary of the TGWU union, said he would make a preliminary report next Tuesday to the NEC, and would ask it to set up a panel to carry out a thorough investigation.
Unlike gifts from supporters, loans do not have to be disclosed in the Commission's regularly updated register of donations to political parties.
This means that questions about their source can normally be put off until the publication of the party's accounts, which in this case is not due until September 2006.
The existence of the pre-election loans to Labour came to light last week amid "cash-for-honours" allegations surrounding some of the party's millionaire backers.
Dr Chai Patel, the founder of the Priory Clinics, and property tycoon Sir David Garrard each revealed that they gave large loans to Labour and were shortly afterwards nominated for peerages.
Both have since indicated they are no longer hoping for seats in the House of Lords.
Mr Blair will face a barrage of questions about the affair when he holds his monthly press conference in Downing Street later today.
Earlier, Home Secretary Charles Clarke insisted peerages had not been offered inreturn for loans, and defended Labour fund-raiser Lord Levy.
"The allegation is completely incorrect. The suggestion there was cash for peerages, which is a suggestion that is in widespread currency, is completely false," he told BBC Radio 4's Today programme.
"It is not the case. Lord Levy does not behave in that way.
"Obviously the independent procedures that this Government has established is entitled, and does, investigate allegations of that kind.
"But it would be quite improper if there was a cash for peerages situation and that is not the case and that is not the way that Lord Levy, or indeed the Labour party generally, operates."