What a way to go: Panic at No 10, paranoia at the Yard

The PM is defiant. he says cash for honours will not force him from office. But the police refuse to be put off the scent and are going to extraordinary lengths to secure their evidence. Marie Woolf and Francis Elliott report

For once, Tony Blair showed a sliver of genuine emotion. He had agreed to be examined, appropriately enough, in a GP surgery in his Sedgefield constituency. When John Humphrys, interviewing the Prime Minister for BBC Radio 4's Today programme, prodded him over the cash-for-honours affair, the hurt was raw.

"I'm not going to beg for my character in front of anyone," he snapped. "I am not going to get into a situation where I am pleading for my integrity, not even in front of the public."

This was more than Mr Blair's by now familiar message of defiance. It was a howl of rage at they way in which a once proud premiership has been brought so low.

The re-arrest of Lord Levy, Mr Blair's chief fundraiser - this time under suspicion of perverting the course of justice - sent Westminster into a frenzy of speculation that charges were about to be laid after a year-long police investigation. And when it was then revealed that Mr Blair had himself been visited by detectives for a second time, the media firestorm raged more fiercely than ever.

"It can be hard to stay calm as it rages," Mr Blair told party activists at a Labour conference yesterday. "But, however buffeted, it should not change our course or our confidence."

His message to his party is not to let the media hound him from office simply on the basis of allegations, so far unproved, that honours were exchanged for donations. But Jon Cruddas, a candidate in Labour's deputy leadership contest, will today tell Mr Blair to go: "The page has turned, it's time to move on."

Suddenly it is being claimed that the Prime Minister might not survive in No 10 until next month, let alone his preferred July date of departure. Certainly there are plenty of reasons to doubt Mr Blair will depart the stage in the manner or at his time of his choosing.

As we report today there are signs this weekend that the investigation has amassed a wealth of evidence and may be quickening to a close. The Crown Prosecution Service (CPS) has already received 10 submissions from the police. The latest was presented on the day that the Prime Minister was interviewed on 26 January. The CPS lawyers, working under strict security, have examined the police evidence in detail and are now instructing officers about the blanks that need to be filled and the people to re-interview.

Labour Party chiefs, meanwhile, are preparing to throw out No 10's favoured timetable when they meet next month to decide the rules to elect his replacement. And it is suggested that Neil Kinnock has already given Mr Blair some frank advice about the manner of his departure at a private meeting around 10 days ago.

While the lawyers and detectives build their case, relations between No 10 and the Metropolitan Police are clouded in paranoia and mutual suspicion. Trust between the police and Downing Street is now at such a low that the police believe the Government is briefing against them, and No 10 aides are convinced that the police are drip-feeding a string of stories to the press. In fact, special security measures have been set in place to stop tabloid journalists and nosy police officers prying into the investigation and "hacking in".

Security surrounding the police investigation is so tight that senior police officers working close by complain they are being kept out of the loop, and are not even being allowed into the room where John Yates's inquiry team are working. The investigations unit is so worried about being spied on that their work is not accessible via the main police computer system. Phones are thought to have been checked for taps, and vital evidence, including tapes of Tony Blair's interviews, are under lock and key.

"Can you imagine how much the Tony Blair interview tapes would fetch?" said one officer. "They are being really secretive. It's an unprecedented level of security. We are talking about all kinds of precautions, like locking all the doors making their papers safe. It's what you would do in a very serious investigation. We are not allowed in the room," said one senior police source. "They are not even on our main IT network."

The paranoia has become so feverish that some in the police even fear that the investigators' phones may have been tapped by the security services, to allow the Government to stay one step ahead.

"It's quite easy to tap phones, you know," said one source. "But it's also not too difficult to find out if you have been bugged. I expect the phones are bugged."

The decision of the police to arrest two of the Prime Minister's closest aides on suspicion of perverting the course of justice was not taken lightly. It followed months of frustration with the incomplete picture of events being given by Downing Street.

Whitehall sources say that although figures at No 10 at no time obstructed the police inquiry, and answered the questions that they were asked, they did so in a manner designed to impart a minimum of information. They did not point the police in the direction of evidence they might need.

Sources close to the inquiry say that investigators have been considering charges of concealing or destroying evidence, giving false information to the police with a view to frustrating a police inquiry and even laying a false trail.

The question of whether witnesses obfuscated, or made statements that contradicted other evidence is now being closely examined. There is even talk that police interviewees who may have made one misleading statement attempted to cover this up with a series of misleading remarks. A trawl of Downing Street's computer systems, including the archive of deleted emails, was made by a team of six police experts. The IT trail they found has been closely scrutinised.

Few would have imagined that, when the Scottish Nationalist MP Angus MacNeil wrote to Scotland Yard asking for an investigation into the sale of honours under an obscure piece of 1925 legislation, Mr Blair's closest friends would find themselves under arrest. The allegations that peerages were given to Labour donors in return for donations and loans has dominated the police inquiry.

Among the dozen of people interviewed by the police are four millionaire Labour donors, including Sir Gulam Noon, the ready meals tycoon, Dr Chai Patel, the founder of the Priory Group of clinics, and the businessmen Sir David Garrard and Barry Townsley, all of whom were questioned under caution.

The role of Lord Levy, the Prime Minister's personal fundraiser, has also been central to the investigation, and is even now being scrutinised closely. The police have been intrigued by what role the Prime Minister's tennis partner may have played in suggesting names of donors for honours and in advising Sir Gulam and Dr Patel that they need not mention the loans on their nomination forms.

The case against Labour is bolstered by the fact that the party went to such extraordinary lengths to keep the loans secret, not only concealing them from senior Labour figures including Jack Dromey, the party treasurer, and Labour's ruling National Executive Committee, but ensuring they were not mentioned in its 2004 accounts.

Matt Carter, the former Labour general secretary, is among those to have been questioned about such secrecy. He is also believed to have been interviewed about possible breaches of electoral law. The Political Parties, Elections and Referendums Act is another piece of legislation being considered by the police. They are looking at whether the party committed an offence by failing to declare the "benefits" from taking loans that were not on strictly commercial loans.

Labour, and, indeed, the lenders themselves, have always insisted that the loans, made at 2 per cent above the bank base rate, were commercial. But others question how Labour, with its multimillion-pound debts, could have ever expected to have paid them back, unless they were regarded as a convenient overdraft facility, or were always intended to be converted into donations later on.

With the investigation entering its final stages, the police are expected to re-interview a number of suspects and witnesses. But Ruth Turner, John McTernan and Jonathan Powell could yet expect another knock on the door from Scotland Yard.

Those working within No 10 say it is a more than usually surreal experience. No one outside the circle under investigation knows the details of what the police are asking them, and it is rarely mentioned in front of them.

There is speculation that within the circle there is mutual suspicion and rumours that one Downing Street aide is "singing like a canary" to protect themselves from suspicion of involvement in any wrongdoing. One aide is even said to have started taking documents home in order to construct a defence away from prying eyes, should the police come knocking at their door.

And as the Chinese walls inside No 10 become ever more maze-like, its once-feared press machine is falling apart. The credibility of Mr Blair's press spokesman suffered a bad blow last week when it was revealed that he had misled journalists. Kept ignorant of the second police interview for a week he had told correspondents that "nothing has changed".

His offence may have been unwitting, but it has left journalists wondering what faith they should place in such assurances in future.

The decision of the police to reinterview Tony Blair, but not under caution, is being construed as a clear signal that the Prime Minister is personally in the clear. He is being treated as a witness by the police ,but could yet be called, if there were a trial, to give evidence under cross-examination.

The arrests of Ruth Turner and Lord Levy suggest that the prospect of charges under perverting the course of justice is now a possibility. Not only does this carry a jail term, the prospect of two key Blair allies with access to the most sensitive political secret would panic the Labour Party. Even if the trial takes place after Mr Blair leaves office, which it would be sure to do, the prospect of disclosure of sensitive documents and key Labour figures in the dock would cause cataclysmic political damage.

The final decision about whether to prosecute lies with Carmen Dowd, a bright barrister who heads the CPS's special crime division. Working under conditions of strict secrecy, she is currently examining evidence contained in 10 files. She is already believed to have received evidence relating to possible breaches of the Political Parties, Elections and Referendums Act 2000. Under examination is whether the party failed to disclose the benefits of taking loans that were not strictly commercial.

The CPS is being closely advised by the Electoral Commission watchdog, which believes the matter should be tested in court. Other parts of the Act are also being examined, although there is frustration that the new law, brought in by Tony Blair, was drafted in a woolly way "by politicians and for politicians", and that it would be hard to sustain a prosecution.

The political situation for Mr Blair is dire - but not as dangerous as some newspapers have suggested. Reports that senior MPs and ministers are preparing to visit Mr Blair to ask him to quit are wide of the mark.

One cabinet minister, not a Blair ally, said he thought the party would respond to his pleas not to be hounded from office by a press pack before a charge had been laid: "This has a feeling of Hutton about it - let's just see what the judgment is. Tony may be in denial about his situation, but I think there is a larger measure of sympathy for him in the party than for some time."

The realpolitik is that no one will wield the knife without the agreement of Gordon Brown - and the Chancellor has no desire to inherit his crown before elections in May which are expected to be disastrous for Labour.

But that does not mean that Mr Blair will be able to retain control over the exact date of his resignation. His preferred plan, to announce his resignation in May and depart after a leadership contest in July, looks increasingly unlikely.

The absence of a challenger to Gordon Brown means that it is likely that he will be elected in only two weeks. A No 10 plan for his candidature to be approved by an "affirmative ballot" of party members has no support on Labour's ruling NEC, which meets next month to thrash out the arrangements.

Unless Mr Blair can come up with an alternative delaying tactic, it seems likely that he will have to surrender power within a fortnight of his resignation. And once he has taken the flak for the May elections the clamour for his departure will be deafening.

The irony of Mr Blair's remark in his radio interview on Friday was that that he would love to "plead for his integrity", but cannot while the police investigation continues.

His friends say he longs to say "what he knew and what he did not know". Unless there is a resolution to the case within the next three months it seems the Prime Minister will have to leave No 10 without having told his story.

Blair's exit strategy: an £800,000 back door

At least we now know about one of Tony Blair's secretive exits - he is spending £800,000 on a new back door.

The Blairs are in the process of buying a Georgian mews house, their fifth property, according to reports yesterday.

It backs on to the Connaught Square house that the Prime Minister bought in 2004 in preparation for his life after Downing Street.

But that house, now worth an estimated £4m, has only one exit on to a public street, something the police have warned him presents them with a major security problem.

The Blairs' solution has been to buy the mews house, a former stable building, and knock the two properties into one. As well as a new back door, the plan will provide extra office space for what is expected to become the world headquarters for the Blair Foundation.

Preparations for the charitable body that will provide Mr Blair with a global platform were first revealed in this newspaper in January. Martha Green, who has supplanted Carole Caplin as the couple's "fixer", was shown to have registered website names for the new foundation.

Ms Green, a former restaurateur and advertising executive, acted as the go-between in the purchase of Connaught Square. It is not known whether she was involved in the latest negotiations.

The purchase has once again raised questions about how the Prime Minister and his wife can afford to service total debts that now approach £5m.

It is estimated that the couple's mortgage repayments will now top £20,000 a month. Mr Blair's salary of £185,771 is a matter of public record but that of his wife Cherie, however, is not. It is thought that she has earned about £140,000 on the lecture circuit to supplement her earnings from the law.

The Blairs' property portfolio first attracted attention in 2002, when Mrs Blair oversaw the purchase of two flats in Bristol for £525,000.

The flats were supposed to be an investment but are believed to have lost value despite years of national house price rises. It seemed initially that the Connaught Square property was a similarly ill-judged acquisition when it was bought for £3.65m in 2004.

But although local estate agents believe the Blairs paid about £200,000 over the odds for their townhouse, the boom in "high-end" London properties has helped them to turn a small profit.

Downing Street declined to comment on whether the tax-payer would be asked to foot the bill for any security alterations that were needed at the Blairs' retirement home.

"No decisions have been taken but any future decisions will of course be taken in accordance with the rules."

Francis Elliott

What the leading lights say

"Improvements made by Blair will be overshadowed by Iraq. That and his blazing vanity"

Dr Jonathan Miller, Theatre Director

"Blair's legacy will be breaking the UN Charter, and relent-less privatisation of all public services"

Ken Loach, Film Director

"He is hanging by a thread. Any other minister would have been out months ago"

Lord Oakeshott, Lib Dem Peer

Three ways the story may unfold

Levy Charged March 2007

What could happen: Lord Levy is charged with perverting the course of justice.

What it would mean: He would face trial on charges of obstructing the police inquiry into the cash-for-honours affair, and could even go to prison.

Blair called as witness January 2008

What could happen: The former prime minister would be called by the prosecution to give evidence in the cash-for-honours trial.

What it could mean: He would be cross-examined in the witness box about what he knew while at No 10.

Cleared August 2007

What could happen: The Crown Prosecution service might decide there is not enough evidence to bring charges.

What it would mean: Relief for Labour and brickbats for the police, who would be accused of wasting taxpayers' money.