Police investigating the "cash-for-honours" affair are looking into whether most of Labour's £13.95m of secret loans were always intended to be converted into donations.
Scotland Yard is studying claims that Labour expected up to 11 of the 12 loans to be turned into permanent donations at a later stage. The device, first used by the Conservative Party, means the loans could be seen as back-door gifts that should have been disclosed by law.
This line of inquiry, being pursued by Scotland Yard, is understood to have made the prospect of prosecutions much more likely than was originally thought when the investigation began in March this year.
Downing Street aides are said to be increasingly worried that charges will be brought when the Crown Prosecution Service (CPS) considers the Metropolitan Police's report. "There is a shiver going down the spine of No 10," one insider said yesterday. "The paper trail is proving stronger than the police expected. They are pretty good at persuading people it is in their best interests to talk."
Police have not ruled out a prosecution under the 1925 Honours (Prevention of Abuses) Act, introduced after the former prime minister David Lloyd-George sold honours. This was the act cited by the Scottish National Party MP Angus MacNeil, whose complaint prompted the current police investigation.
But it is now thought charges are more likely to be brought under the 2000 Political Parties Elections and Referendums Act, which forced parties to publish details of donations over £5,000. Although loans at commercial rates of interest do not have to be disclosed, anyone disguising donations as loans if they were intended to become permanent gifts could potentially have broken the law.
Another avenue being explored by police which has set off alarm bells in No 10 is the prospect of conspiracy charges to commit an offence under the 2000 Act, which might improve the chances of a successful prosecution. A decision by the CPS is expected in October or November.
Four of Labour's 12 lenders were nominated for peerages last year, but blocked by the Lords Appointments Commission. Since the controversy, some of the 12 businessmen have asked to be repaid. One is due to get his money back next month and another wants to be repaid in January.
Last night Lord Levy, Labour's chief fundraiser, who was arrested as part of the inquiry last week, faced further scrutiny. Channel 4 News reported that his secretary, Jean Cobb, who was awarded a CBE in 2002 for "charitable services", worked for three charities headed by Lord Levy - Jewish Care, Jewish Free School and Community Service Volunteers.
The Liberal Democrats called on the Cabinet Office to look into whether she received preferential treatment, while the Labour MP Stephen Pound told the programme: "Hundreds, thousands are members of charities. We belong to charitable groups, we support them, but we don't get recommended for honours."
Labour MPs believe the "cash-for-honours" affair could cut short Tony Blair's plans to remain in power well into next year. According to The Spectator magazine, Alastair Campbell, his former director of communications, has said Mr Blair will resign in "a year and a bit". This suggests he intends to stay until Labour's annual conference in September next year.
Labour's 12 lenders
* Sir David Garrard - £2.3m. Property developer and co-owner with Andrew Rosenfeld of the property group Minerva prior to flotation. Nominated for a peerage.
* Andrew Rosenfeld - £1m. Co-owner of Minerva.
* Richard Caring - £2m. Fashion magnate, owns Ivy restaurant in London. Said to be worth £300m.
* Lord Sainsbury of Turville - £2m. Science minister and member of supermarket dynasty.
* Dr Chai Patel - £1.5m. Head of Priory rehab clinics. Nominated for peerage.
* Rod Aldridge - £1m. Former executive chairman of IT firm Capita, which has won public contracts. Said loan was "personal decision on my part".
* Professor Sir Christopher Evans - £1m. Founder and chairman of Merlin Biosciences.
* Barry Townsley - £1m. Broker and chairman of financial services company. Nominated for peerage.
* Nigel Morris - £1m. Co-founded Capital One Financial Services.
* Gordon Crawford - £0.5m. Chairman of London Bridge Software, reported to have made a fortune of more than £1bn.
* Derek Tullett - £0.4m. A stockbroker and philanthropist.
* Sir Gulam Noon - £250,000. "Curry King", says that he was asked to keep his loan secret when he was nominated for a peerage.