Tony Blair's flagship policy of providing an extra 200 city academies was further undermined yesterday amid a series of damaging setbacks relating to the cash-for-peerages scandal.
The political fall-out from the affair deepened as Britain's biggest teaching union threatened to stage a national strike over its opposition to the Prime Minister's education reforms.
The warning, from the National Union of Teachers, came as former schools minister David Miliband was dragged into the row after he was named in covert tape recordings of a former government adviser who was arrested last week in connection with the police investigation into the affair.
In a separate move, Lord Levy, Labour's chief fundraiser, yesterday faced calls to quit as head of the Specialist Schools and Academies Trust, the organisation that recruits financial backing for the new schools.
The fresh developments heightened fears in Downing Street that the row over links between sponsors of the city academies and honours will frighten off potential benefactors from investing more large sums in the controversial schools.
Lobbyists who have been involved in the education plans confirmed last night that private sponsors for the controversial schools could dry up after the arrest by Scotland Yard detectives of Des Smith, the former adviser to Downing Street, who is alleged to have said privately that anyone giving £10 million in sponsorship for an academy would be "a certainty" for a peerage.
"The Labour Government is radioactive at the moment. Nobody in big business wants to be associated with its initiatives. There is more chance of them investing in a chicken farm in Thailand than a city academy." said the head of one PR firm.
The continuing row over the links between the financial backers for the academies and honours is threatening to poison Mr Blair's flagship policy and could force a change of policy. "It's a total balls-up. It is going to make it very difficult to raise the cash from private sponsors. We may have to rethink the scheme," said a senior minister. Many of the sponsors are expected to pay £2m but get a say in the ethos of the academies. Ministers believe more direct state funding may be needed to plug the gap.
Lord Levy faced calls to quit as president of the Specialist Schools and Academies Trust until he is cleared by the police inquiry following claims that his position was "untenable". It is believed eight academy sponsors have received honours, although Lord Levy denies making nominations "Lord Levy should consider suspending his position until the police investigation is complete," said Norman Lamb, chief of staff to Menzies Campbell, the Liberal Democrat leader.
Lord Levy is among those to be interviewed John Yates, the Deputy Assistant Commissioner at Scotland Yard heading the police investigation into complaints that Tony Blair may have breached 1925 anti-corruption laws by offering honours for party loans and sponsorship of the academies.
Others could include David Miliband, the former schools minister, who yesterday denied making any nominations for honours. His name was dragged into the row in a report from the undercover investigation by The Sunday Times which led to Mr Smith's arrest. It reported Mr Smith told the journalist that Mr Miliband was the minister to approach for honours for those investing in academies.
Downing Street yesterday denied a report that the police had already approached Downing Street for a date next month on which they could interview the Prime Minister. However, Scotland Yard has not ruled out having to interview Mr Blair.
Education ministers last night insisted that the academies' commitment would be met. A spokesman for Education Secretary Ruth Kelly said: "We will not be distracted from giving some of the most disadvantaged children in the country the best possible education.''
Blair 'in it up to his neck,' alleges former head of Labour fundraising
The former head of the Labour Party's high-value fundraising campaign has written in a weblog that Tony Blair was "in it up to his neck" over the peerages for cash row.
Dr Nick Bowes, 30, who was responsible for ensuring the legality of major donations to the party, made the highly embarrassing allegations against the Prime Minister in an internet diary which he published anonymously as "Tales of the Northern Monkey''.
His web diary suggests the rules on the declaration of donations were circumvented with loans to avoid people realising that honours were being made for high value sponsors of City academies.
Mr Bowes said: "The whole peerages thing is corrupt. It is one of the biggest forms of patronage still in the hands of the Prime Minister. I just wonder whether the PM really believes in sorting out the House of Lords, as it may just rob him of his one first-class way of rewarding big donors and sponsors of city academies."
In his entry for 30 March, written after Labour named 12 businessmen who gave the party secret loans, Mr Bowes added: "I still think the crucial questions are (a) why were donors persuaded to change their donations into loans, and (b) to what extent was the Prime Minister involved?
"In answer to (a) you have to conclude it is because they were going to get peerages and Number 10 didn't want people to draw a relationship between the two and (b) the Prime Minister was in it up to his neck, and was personally involved."
The allegations may raise more embarrassing questions for Mr Blair if he is interviewed by Scotland Yard.
Mr Bowes since withdrew the weblog and said his remarks were "wild and unsubstantiated claims", when it was discovered that it had been openly read instead of being restricted to a few friends online.
In the diary, he also claimed that Lord Levy was responsible for drawing up the list of lenders for honours, saying: "It's got the grimy hands of Lord Levy all over it... most on the list have given substantial money to New Labour. Some of the elevations I think would be quite good... unlike fly-by-nights like Sir Gulam Noon - who frankly is the supporter of whomever is in Government and therefore most likely to make him a lord - and Barry Townsley, who I have always suspected of being a Tory."Reuse content