The deep division will result in the committee's six Tories, including Sir Ivan Lawrence, the chairman, and its five Labour MPs producing two diametrically opposed reports.
Chris Mullin, Labour MP for Sunderland South, drafted an 8,000-word amendment which now forms the core of Labour's minority report.
The rare event of a select committee reaching so little agreement stems from the Conservatives' backing for broadly retaining the status quo. Labour members want new rules on disclosure of donors and shareholder ballots to approve corporate gifts.
The committee's inquiry was prompted by the Asil Nadir affair - the fugitive tycoon allegedly sought a knighthood in return for his munificence - and coincides with one of the worst cash crises in Tory party history. Conservative Central Office wants regulation kept to a minimum so that contributions, especially those from abroad, can continue to be made quietly.
A large slice of party income - believed to be worth pounds 7m in 1992 - comes from foreigners with no vote in Britain.
One committee member said yesterday: 'The Tories want the status quo because it's not a level playing field, and because of their party's dire financial straits.'
Under present law a political donation of more than pounds 200 must be reported to company shareholders. But there is no provision for them to vote.
Labour's report will spotlight the strict rules that apply to political donations by trade unions.Reuse content