Lord Levy tried to stop MPs publishing Labour donor's 'frank' letter on secret loans

Commons committee expected to recommend a new Corruption Bill in its long-awaited report on the cash-for-honours affair

Lord Levy tried to suppress a millionaire's no-holds-barred account of secret dealings with Labour Party officials that pulled him into the "cash for honours" scandal, it emerged last night.

Lawyers acting for Tony Blair's former fundraiser tried to stop MPs publishing a frank letter from Sir Gulam Noon in their long-awaited report into the honours system, which will be published on Tuesday.

The letter, sent to the Commons Public Administration Select Committee during its inquiry into propriety and peerages, will increase the Government's discomfort, as the Labour Party prepares for another police investigation into its efforts to attract cash from wealthy backers.

Sir Gulam's remarkable account promises to cause further personal embarrassment to Lord Levy, a key figure in the secret loans operation that propelled Labour into a 16-month police investigation into claims that peerages were offered in return for cash donations to the party.

The letter reveals that "a senior party man" told Sir Gulam, a ready-meals millionaire, not to declare his 250,000 loan to Labour while his nomination for a peerage was being considered, because it was refundable and therefore circumvented party funding rules.

Friends of the tycoon, believed to be worth 65m, said last night that he felt let down by Labour, which left him alone to deal with the media once details of the arrangement emerged. His letter to the committee is believed to detail all his dealings with Labour figures, particularly the head of Mr Blair's fundraising operation, during negotiations over the loan, agreed in April 2005.

A spokesman for Lord Levy confirmed that the peer's legal team had attempted to prevent the publication of Sir Gulam's letter in its entirety. He added: "We fully recognise the right of the committee to publish whatever they feel is right to publish.

"However, we did state to the committee that there were certain contents of the letter which we did not agree with."

The committee, chaired by Labour MP Tony Wright, resisted the pressure and went ahead with plans to include the full text in its report. However, it will be included as an annex, with a note stating that it is Sir Gulam's version of events.

The report is the final act in the damaging sequence of events sparked by the revelation early last year that four tycoons nominated by Labour for peerages had secretly loaned the party millions of pounds in the run-up to the last general election.

The committee's inquiry was halted at the request of the police after Scotland Yard launched its own investigation into the affair. But, after a series of key Downing Street figures including Mr Blair were interviewed, the Crown Prosecution Service decided there was not enough evidence to press charges.

Assistant Commissioner John Yates subsequently told the committee that his investigation was obstructed by a lack of co-operation. Mr Yates also said he had received letters from some of the main players' lawyers before he gave evidence to the committee in October, warning him against divulging information that was gained during the police investigation.

The report is not expected to criticise individuals, but it will be scathing about the current system of awarding and monitoring honours in the UK.

The final recommendations, thrashed out during a two-hour meeting last Tuesday, will include demands for a new Corruption Bill, covering a wide area of public life, which members feel would bolster efforts to prevent the system being brought into disrepute again.

"The view was that the 1925 legislation banning the sale of honours was effective in itself, but it could not be expected to cover all the allegations of corrupt practices surrounding the main issue," a source close to the committee said.

"There was some sympathy for Mr Yates because he didn't have much chance of putting together a watertight case although a number of members questioned why it was allowed to progress so far nevertheless. But the experience shows that there is a need for tougher legislation across the piece."

The Labour-dominated committee will not reserve its criticism for the party, but will instead criticise the way all the main parties have handled nominations for high honours.

The committee will also call for a more transparent system of proposing recipients and awarding honours, if the rules governing patronage are to be allowed to survive, along with a new, beefed-up appointments committee to adjudicate on nominations.

It will also support root-and-branch reform of the House of Lords to revive public confidence.