Labour ran a virtual "supermarket in honours" and "organised" the award of peerages to millionaire party donors, the Liberal Democrat leadership contender Chris Huhne has claimed.
Mr Huhne said that the chance of so many Labour donors being given peerages by accident was "about the same as being hit by an asteroid".
He challenged the Government to take him to court and disprove his accusation that honours were deliberately offered to generous Labour backers.
In an intervention that threatens to reignite controversy over the cash-for- honours affair, despite prosecutors' decision not to press charges, the Lib Dem environment spokesman said that the affair has meant that "the whiff of corruption has become a nauseating stench".
In an interview with The Independent on Sunday, Mr Huhne alleged that "there was an organised arrangement whereby a very large amount of money was donated to the Labour Party and at the same time the major donors received peerages and knighthoods".
"It's quite clear what was going on," he said. "This was basically a supermarket in honours. It is completely mad to suggest other than this was an organised matter. I am very happy to say that on the record. If they [the Government] think otherwise they can very happily take me to a libel court."
The MP, who is competing with front-bench colleague Nick Clegg to take over as Liberal Democrat leader from Sir Menzies Campbell, said the detective who led the investigation into cash for honours was the only figure in the affair who belonged in the House of Lords. "If anyone deserves a peerage it is John Yates," he said.
Arguing that the Lib Dems needed to retain their radical edge if they are to dent Labour and Tory poll ratings, Mr Huhne called for a wholesale review of the system of patronage, including the abolition of the Prime Minister's right to award peerages, and a fully elected House of Lords.
He said ordinary people should become more involved in the political process and get the same tax breaks for giving to political parties as to charities: "I would introduce up to a certain limit the same sort of tax relief on membership subscriptions and other donations to political parties as you get to registered charities."
He also promised to strengthen the party's commitment to reforming the voting system and said establishing proportional representation was a condition for any talks with other parties about coalition government.
"I cannot conceive of how we can have a partnership government and a partnership politics without a change in the system on both fixed-term parliaments and fair votes," he said.
Mr Huhne launched biting attacks on both David Cameron and Gordon Brown, claiming that neither had adequate experience of life outside politics.
But, in an apparent jibe at Sir Menzies, who was accused by some critics of being too shy to criticise the establishment, he said that the party needed to be "more ambitious", more radical and less deferential.
"We have to be different from both Labour and the Tories and have a hard edge to our radicalism so we are not just the party that wants to change the ministerial faces on the back seats of the limo," he said.
"We actually want to change the whole system."