Mr Barak and the millionaire car dealer who funded his victory

Millions of pounds were illegally poured into the election campaign coffers of Ehud Barak, the Israeli Prime Minister, including large sums from charitable foundations set up by a millionaire who made his fortune selling Nissan cars in Britain.

Millions of pounds were illegally poured into the election campaign coffers of Ehud Barak, the Israeli Prime Minister, including large sums from charitable foundations set up by a millionaire who made his fortune selling Nissan cars in Britain.

The allegations of sleaze sweeping though Israel's highest political circles came close to Mr Barak himself after the state comptroller concluded that his election team committed "grave" campaign finance illegalities.

Among the sources of money were charitable funds set up by Octav Botnar, the former head of Nissan UK, a car-importing franchise which crashed in 1991 amid allegations of massive tax fraud. The millionaire - a keen supporter of Britain's Conservative Party - moved to Switzerland, where he died in mid-1998.

The comptroller's findings prompted Israel's Attorney-General, Eliyakim Rubinstein, to order police to launch a criminal inquiry into the campaign financing of One Israel, the electoral alliance which sprang Mr Barak into office last May and defeated Benjamin Netanyahu.

The affair, which is deeply embarrassing for the Barak government, is the latest allegation against some of the country's most senior figures. It has prompted deep concern among Israelis about the level of corruption within the closely knit group at the top of the Middle East's only democracy.

Israeli detectives are already busy investigating sleaze allegations against a list of other powerful figures - including the 75-year-old president, Ezer Weizman; the former premier, Mr Netanyahu, and his wife, Sara; and an ex-Justice Minister. A leading newspaper baron and multi-millionaire, Ofer Nimrodi, is also behind bars awaiting trial for conspiracy to murder and defraud.

The comptroller's findings against Mr Barak's election team were in a damning report published yesterday. It has come at a particularly awkward time, when Israel is under pressure from the US government to make peace with Syria and the Palestinians.

The report concluded that One Israel had - clearly - violated campaign finance laws by funnelling large amounts of foreign money through non-profit organisations set up to support Mr Barak. Israeli law includes tight restrictions on foreign campaign donations. The money was then spent on surveys, door-to-door recruiting and campaign material, it said.

Among the millions that illegally ended up in his election coffers were funds from Botnar. The report found that the millionaire - a supporter of Israel and the Middle East peace process - gave large sums to public causes in Israel.

After Botnar's death from cancer at the age of 84, money was transferred from charitable foundations which he had set up in tax havens worldwide to the Barak campaign coffers. The report said that among the trustees of these foundations was Mr Barak's special adviser, Yitzhak Herzog, now the Cabinet Secretary; he claims to have been acting on the late millionaire's instructions.

Calling the violations "grave", the comptroller, Eliezer Goldberg, imposed a fine of 5.5m shekels (£890,000)and ordered One Israel to return a further 7.5m shekels. The alliance had "trampled on the law", he said, presenting his report to the Knesset, Israel's parliament.

Israel's stock market plummeted sharply within the first few minutes of the report's release amid investor fears that the scandal would weaken Mr Barak's government. Several of his senior advisers may now depart undermining its ability to muster public support for the peace process. Mr Barak could find it hard to raise votes for a crucial referendum on returning the Golan Heights to Syria, if the peace negotiations ever reach that stage.

Although the comptroller's report did not directly implicate the premier, it was sharply critical of Mr Barak for failing to ensure that his electoral alliance abided by the law. the Prime Minister moved swiftly to rebut this charge yesterday, saying that he was not involved in election fund-raising, and boasting that he was elected not by spraying around money but by a "sweeping popular majority".

The crisis, Mr Barak's first in seven months in office, isa blow to his overall image as the country's most decorated war hero. But for Israelis, it raises larger questions about the tightly knit (and often related) political élite and its business associates which, like a mini-aristocracy, has long wielded influence behind the scenes. The public cannot fail to notice that two of the Barak advisers singled out in the report were Mr Herzog and Doron Cohen. The former is the son of Haim Herzog, once Israel's president; the latter is Mr Barak's brother-in-law.

A police probe was ordered last week into the activities of the present president, Ezer Weizman, after it emerged that, while serving as a member of the Knesset and as science minister between 1988 and 1993, he accepted hundreds of thousands of pounds from a French textile millionaire, Edouard Saroussi.

Ignoring an angry chorus calling for him to step down until the police have finished their work, the president - a feisty former combat pilot who insists he has done nothing wrong - has carried on with his duties. In the next few days, he is scheduled to swear in judges, undeterred by the cloud hanging over him.

Israelis are also waiting to find out whether the Attorney-General plans to charge Mr Netanyahu and his wife, Sara, who have been repeatedly grilled by police over suspicions that they illegally kept tens of thousands of pounds worth of gifts belonging to the state. These include silverware, candlesticks, carpets, pictures, scarves and a gold letter opener from US Vice President Al Gore. The Netanyahus - who also face allegations of paying a bribe and contracting building work at the government's expense - have denied the allegations.

To this should be added lesser scandals involving several senior police commanders, and the former Justice Minister, Tzahi Hanegbi - (whose mother was a prominent parliamentarian with the Likud party) - who faces allegations of taking bribes fiddling expenses and falsely registering a company.

The frustration in Israel is palpable. Decisive action must be taken against the moral malaise which has spread rapidly from limb to limb in the body of Israeli society, fulminated commentator Ari Shavit, in Ha'aretz newspaper recently. Many Israelis would agree.