Tony Blair's attempt to draw a line under the "loans for peerages" scandal was scuppered when Scotland Yard launched an investigation into the alleged sale of honours by Labour.
Hours after Labour's ruling national executive committee (NEC) agreed to close ranks to limit the damage from the affair, the Metropolitan Police said its specialist crime directorate was looking into three complaints about alleged breaches of a 1925 law passed following the sale of peerages by David Lloyd George when he was Prime Minister.
Two of the complaints were made by the Scottish National Party and Plaid Cymru, and Labour officials hope the move will be seen as a political stunt. There has been only one prosecution under the 1925 Honours (Prevention of Abuses) Act.
The police inquiry has prolonged Mr Blair's agony over the £14m of secret loans provided by 12 rich businessmen, four of whom were blocked when he proposed them for peerages. Scotland Yard has informed the Home Office about the investigation, which will be led by Deputy Assistant Commissioner John Yates.
Angus MacNeil, an SNP MP who made a formal complaint, welcomed the decision, saying: "If Labour has been receiving dirty money, then we have a right to know, and ultimately action must be taken. The law is the law and it applies to all of us, even the Prime Minister." He added: "With 80p in every £1 received by Labour from individual donors coming from people who have received an honour and every Labour donor of over £1m in receipt of a peerage or a knighthood, there are big questions to answer."
In another sign that the controversy would not die down, the Home Secretary, Charles Clarke, rallied to Mr Blair's defence by hitting back at Jack Dromey, Labour's treasurer, who exposed the Prime Minister's crucial role in the affair last week when he complained he was kept in the dark. Mr Clarke told journalists: "It raises serious questions about Jack's position as treasurer. Any competent treasurer would look at the finances of the organisation they are involved with." He added: "It should be part of the job to look at the finances. If he wasn't asking that question, you would have to ask how well he was doing that job."
At a bruising NEC meeting, the party reasserted its grip over finances after criticism that Mr Blair ran a parallel operation by seeking the secret loans to fund last year's general election campaign. The "clear the air" meeting left important questions about the affair unanswered.
The NEC was not given any fresh information about the terms of the loans or when they are due to be repaid. Party officials said the interest to be paid on them will be included in Labour's accounts to be published in June.
Although Mr Blair faced tough questions, some NEC members were frustrated that their colleagues were prepared to give him the benefit of the doubt. "Teflon Tony has got away with it again," said one member.
The NEC agreed to take back its "right for responsibility" for oversight of all party funding and financing. Party officers will assume control of all donations and commercial loans, which will be publicly declared.
An inquiry will ensure that lessons are learnt so that the mistakes are never repeated.
Sir Jeremy Beecham, the chairman of the NEC, said: "Tony Blair didn't apologise. He said he understood the concerns of some in the party."
Sir Jeremy cleared Lord Levy, the party's chief fundraiser, of blame for keeping the loans secret, saying: "He is not a Mafia strongarm man going round running a protection racket. If he is asked to raise money, he will do it in his inimitable way." He admitted there had been "gaps in communication" but refused to blame Mr Blair for failing to tell senior party figures, including Mr Dromey, who welcomed the NEC's decision, and the Deputy Prime Minister, John Prescott.
Labour figures hope that the focus will now switch to the Tories, who have promised to declare any future loans but do not want to reveal previous ones totalling a reported £18m.
They have refused to say whether they were lent money by foreign residents, from whom donations are banned.
Last night the Electoral Commission increased the pressure on the Tories to match Labour by disclosing the names of lenders. Sam Younger, the commission's chairman, wrote to all parties asking them to make available all the information immediately on lenders. "We are asking them to search their consciences," said a commission official.
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