Labour's chief fundraiser admitted today he was aware that a millionaire property developer was disguising his donations - but insisted he was trying to stop the practice.
In a statement, Jon Mendelsohn said he learnt of the arrangement soon after being appointed in September and had been "unhappy" with it.
He wrote to donor David Abrahams with a view to informing him that donations through intermediaries "would not play a part in our future plans".
"I was very concerned that these arrangements did not meet the strict transparency test that I wished to see in place," Mr Mendelsohn said.
"I did not discuss this with the officers of the National Executive Committee or party leadership but I decided to tell Mr Abrahams that his method of contribution was unacceptable.
"I had no intention of asking Mr Abrahams for donations and wanted to give him the courtesy of explaining this personally."
The statement was released just moments before Gordon Brown was due to face a torrid Prime Minister's Questions in the Commons.
Last night Mr Abrahams revealed that he had received a letter from Mr Mendelsohn describing him as one of the party's "strongest supporters", and asking for a meeting to discuss allocation of "resources".
Today Mr Mendelsohn insisted he had raised the issue of disguised donations with the then Labour general secretary Peter Watt, who had informed him it was a "long-standing" arrangement and was within the law.
"I was informed by Peter Watt, to whom I reported, that this was an arrangement with David Abrahams which was long-standing and which was appropriately dealt with in relation to the party's reporting requirements.
"He told me these donations fully complied with the law and I had no reason to doubt that information.
"However I was unhappy with the arrangement whereby donations were taken through a third party and was determined it would not play a part in our future plans. I was very concerned that these arrangements did not meet the strict transparency test that I wished to see in place."
Mr Mendelsohn, whose title is director of general election resources, revealed that he signed the letter destined for Mr Abrahams last Thursday - before the scandal emerged in a Sunday newspaper.
But he stressed that the idea had never been to secure donations from the businessman, and was rather to inform him in person that his use of intermediaries could not continue.
"(Mr Abrahams) was only given the general reason for the meeting that I wanted to update him on our plans. He declined to have a meeting on this basis.
"He specifically asked if it was for asking for money and was given the reply that it was to update him on our plans."
In furious exchanges in the House of Commons, Conservative leader David Cameron said the funding affair now raised questions about the integrity of the Prime Minister. Voters were asking if Mr Brown was "cut out for the job", he said.
Mr Brown told MPs at his regular weekly session of Prime Minister's Questions that Labour's acceptance of proxy donations was "completely unjustifiable" and promised that the party would co-operate fully with any investigations, whether by the Electoral Commission or the police.
Flanked by his under-fire deputy Harriet Harman, the Premier said that Mr Mendelsohn had made clear he was "unhappy" about the arrangements, which he became aware of only after his appointment as a fundraiser in September.
Mr Brown said he became aware of the situation on Saturday and took immediate action.
But Mr Cameron told MPs: "The Prime Minister's whole explanation beggars belief.
"This goes to questions of the Prime Minister's own integrity.
"Does he really expect us to believe that someone who even his own side say is a control freak was preparing for an election, sorting out the finances and sitting round a table with everyone caught up in this scandal and yet didn't have the first idea what was going on?
"We have had 155 days of this Government. We have had disaster after disaster - a run on a bank, half the country's details lost in the post and now this.
"His excuses go from incompetence to complacency and there are questions about his integrity.
"Aren't people rightly now asking: Is this man simply not cut out for the job?"
Mr Brown said Mr Mendelsohn had "absolutely no involvement" in the Abrahams donations, which had been coming in over the course of four years.
Labour would do "everything in our power" to ensure it followed "acceptable" standards in relation to its fundraising in future, said the Prime Minister.
It was in the interests of all parties to ensure the integrity of political fundraising, and the Government was ready to change the law to do so if necessary.
"We are ready to take any further measures - and I hope there will be all-party support - so that everything in party politics is above board, including the use of third party sources for donations," said Mr Brown.
He rejected Mr Cameron's suggestion that he should have called in the police as soon as he became aware that unlawful acts might have taken place.
"The Electoral Commission will make its decision as to whether this is a matter for the police," said Mr Brown. "We will co-operate in any way possible with either the Electoral Commission or the police or both."
Mr Cameron accused the Prime Minister of "wriggling".
But Mr Brown rejected his accusation of incompetence, telling MPs, to cheers from Labour backbenchers: "Competence is the lowest interest rates for a generation, the lowest inflation for a generation, the highest employment for a generation, investment in the health service, the minimum wage, properly financed education - and we will continue to do our best by the country."
Mr Mendelsohn said he had discovered Mr Abrahams' habit of giving money through intermediaries while hunting for potential sources of funding after starting his unpaid role on September 3.
"When I was researching previous gifts and plans, I inquired into the names of individuals I did not know or otherwise recognise, which included Janet Kidd, Raymond Ruddick and latterly John McCarthy."
Mr Mendelsohn said he offered to provide all details he knew "immediately" after Mr Brown announced yesterday that an independent review of the issue would be carried out.
The statement will raise difficult questions about why the fundraiser did not tell the Electoral Commission, police, or other senior Labour figures that dubious practices had been taking place.
Mr Brown has insisted he knew nothing of the donations until Saturday evening - despite having personally overseen the appointment of Mr Mendelsohn.
Both the Premier and Environment Secretary Hilary Benn have admitted refusing donations from Ms Kidd - Mr Abrahams' secretary.
Mr Benn said he turned down £5,000 for his deputy leadership campaign because Labour peer Baroness Jay had warned him that the cash came indirectly from the businessman.
Mr Brown, meanwhile, has said his leadership campaign had a blanket policy of refusing gifts from people who were not known to them.Reuse content