Labour tries to drag the Tories into loans scandal

Labour MPs have been ordered to turn the tables on the Conservative Party over its secret loans from wealthy backers in an attempt to deflect attention from the "loans for peerages" affair.

The Tories may have received more than £3m in loans from foreign-born supporters, it emerged yesterday. The Cabinet, alarmed by the damaging publicity over Labour's £14m of secret loans from 12 rich businessmen, agreed last Thursday to mount a counter-offensive over an estimated £24m lent to the Tories.

The Conservatives were the first to use loans as a way round a law forcing political parties to disclose donations of more than £5,000.

Downing Street has sent all Labour MPs a briefing note listing the "questions they must answer" - including whether they accepted any loans from "foreign sources." It says: "Until the Tories answer the questions put to them, their calls for greater transparency can have no credibility."

There were signs that Mr Blair may drop his long-standing opposition to an elected House of Lords in an attempt to break the perceived link between peerages and cash aid for parties. Patricia Hewitt, the Secretary of State for Health, said: "That's where we are going."

Foreign loans are not yet banned by law even though it is illegal to accept donations from people who are not registered to vote in Britain.

The £3m the Tories borrowed from foreign-born sources reportedly included £1m from Johan Eliasch, a Swedish sports equipment tycoon, and £2.5m, through an investment trust, from an Australian hedge fund millionaire, Michael Hintze, who has dual nationality and lives in London.

A furious John Prescott, the Deputy Prime Minister, denied suggestions that he made planning decisions in favour of Sir David Garrard, who lent Labour £2.3m and was chairman of Minerva until April last year, and his successor, Andrew Rosenfeld, who lent the party £1m.

Minerva plans a £500m shopping mall development in Croydon, south London. Mr Prescott's Office of the Deputy Prime Minister backed a decision last year by Croydon Council not to grant permission for a rival mall - called Bishops Court 2 - in the area.

Mr Prescott dismissed as "a lie" any link between his department's planning decisions and the loans, which he said he did not know about. "It's quite untrue to say there was a deal or I made the decision," he said. Asked if he had ever met Sir David or Mr Rosenfeld, he replied: "I don't think I have ever met them. I am not a great one for circulating among businessmen. I just do my damn job and therefore I resent it when these implications are made."

Mr Prescott insisted that the decision to allow Miverva to go ahead with the Croydon mall was taken by the council. The City of London authority, and not his department, gave Minerva the go-ahead for a skyscraper, he added.

Speculation at Westminster is that Mr Blair, who has previously thrown his weight behind an appointed Lords, is now ready to move towards a democratically elected second chamber.