Sex scandal threatens Gillard's fragile government

Labor MP accused of using trade union credit card to pay thousands to brothel

When you have a parliamentary majority of one, the last thing you want is a sex scandal enveloping an MP in a marginal constituency. But that is precisely Julia Gillard's situation, a year after the inconclusive election that brought her Labor government to power.

Police are investigating allegations that Craig Thomson, a Labor backbencher who used to be national secretary of the Health Services Union, used his union credit card to pay thousands of dollars to a Sydney brothel. He has denied any wrongdoing and claims that another person, not named, took the card and forged his signature.

With support for Labor at rock bottom – an opinion poll yesterday put it 14 points behind the conservative coalition – the affair has the potential to topple Ms Gillard's government. If convicted, Mr Thomson would have to quit parliament, triggering a by-election that Labor would almost certainly lose. The coalition would then either take control or there would be fresh elections.

Last week it was revealed that Labor had paid legal fees of about A$90,000 (£57,000) incurred by Mr Thomson in relation to a defamation action against The Sydney Morning Herald concerning the allegations. The gift saved him from bankruptcy, which would have forced him to resign his seat. He dropped the legal action in May, just before it was due to go to court. The Herald aired fresh allegations this week, publishing excerpts from court documents that appear to show that Mr Thomson's credit card was being used at the same time that calls were made to an escort agency – as well as to Labor and union contacts – from his phone.

The scandal relates to a period before Mr Thomson entered parliament in 2007, but still has the potential to be highly damaging. There is now the possibility of a criminal investigation, which emerged yesterday after the allegations were referred to New South Wales police by the coalition's legal spokesman, George Brandis. Last night, Mr Thomson, whose wife is pregnant, stepped down as chairman of a parliamentary economics committee, saying that the "current circumstances" were a distraction from its work. He holds his seat of Dobell, on the New South Wales coast north of Sydney, with a majority of only 5 per cent.

Ms Gillard, whose minority government depends on the support of one MP from the Greens and four independents, has backed Mr Thomson. Yesterday she told parliament that, because of the police investigation, it would be "inappropriate" for her to comment. The evidence being reviewed by police includes a statement from a handwriting expert concluding that Mr Thomson probably signed one of the disputed credit-card dockets, and documents purportedly showing that he used the card for the same purpose on other occasions.

Police said they were assessing the evidence to determine whether a crime had been committed. Mr Brandis claimed in a letter that the documents showed a "strong prima facie case" of larceny, fraudulent appropriation or fraud. "The overwhelming weight of evidence... suggests that Thomson himself received, signed for and authorised payment for the services," he wrote.

In a radio interview, Ms Gillard attempted to deflect attention away from Mr Thomson, noting that a coalition politician, Mary Jo Fisher, is facing court for allegedly shoplifting groceries from a supermarket and assaulting a security guard. "There is only one member of parliament who's been charged with a criminal offence – it's not a member of my team," she said.