Labour's chief fund-raiser Lord Levy was arrested today in connection with Scotland Yard's so-called "cash for honours" inquiry.
The Metropolitan Police is investigating whether peerages were offered in return for financial support to parties.
The force confirmed this afternoon that a man had been arrested today, but would not confirm his identity.
Sources said the man held was Lord Levy.
The peer, who plays tennis with Tony Blair and is nicknamed Lord Cashpoint for his role in raising funds for Labour, is still in custody.
A police spokesman said: "Officers from the Specialist Crime Directorate requested a man to attend a London Police Station this morning where he was arrested in connection with alleged offences under the Honours (Prevention of Abuses) Act 1925 and Political Parties, Elections and Referendum Act 2000."
He added: "The man is currently in custody."
Tony Blair's official spokesman said: ``This is a party matter and I'm not going to comment.''
The spokesman confirmed Lord Levy has remained the Prime Minister's personal Middle East envoy.
Lord Levy's arrest follows allegations that he told a businessman he did not need to inform the committee vetting his Lords nomination about a £250,000 loan to the Labour party.
His alleged advice to Sir Gulam Noon came in a telephone conversation last October after the curry entrepreneur had declared the loan in papers to the committee, the BBC claimed earlier this week.
Sir Gulam subsequently retrieved the papers from Downing Street and submitted them again without mentioning the loan, the BBC said.
His peerage was later blocked when the loan came to light.
The businessman said he had "done nothing wrong" and maintained that he had declared the loan in his nomination papers.
Lord Levy is at the centre of allegations that major Labour financial backers were rewarded with nominations for peerages and other honours - something the party strongly denies.
Police have asked two parliamentary committees to postpone evidence sessions with the peer in order to avoid prejudicing their own inquiries.
The high profile investigation is being led by one of Scotland Yard's leading lights, Deputy Assistant Commissioner John Yates.
The force has said it hopes to make an initial submission to the Crown Prosecution Service on the allegations this autumn.Reuse content