Serbian money will be retained

The Conservative inquiry into reports that the party accepted donations from businessmen linked to Radovan Karadzic, the Bosnian Serb leader wanted for war crimes, is expected to conclude that there was no impropriety and that no money should be returned.

But the inquiry, launched by Tory chairman, Brian Mawhinney, has been complicated by growing pressure on the Tory candidate who introduced the donor to stand down.

John Kennedy, the candidate for Halesowen and Rowley Regis, introduced a Yugoslav-born businessman to Jeremy Hanley, the former Tory chairman, in 1994. Mr Kennedy, originally John Gvozdenovic, has sought to explain the position of Mr Karadzic on television in the past, although he recently said that anyone against whom there is evidence of genocide must face charges.

Some Tory MPs and party officials are pressing Dr Mawhinney to disown Mr Kennedy, although Warren Hawksley, half of whose present constituency goes into the new, marginal, Halesowen seat, said: "I have heard nothing to suggest that he would be anything but an excellent MP."

Dr Mawhinney has not yet spoken to Mr Kennedy, but Tory sources said it was possible that the Tory chairman could write to the Halesowen Tory association if, after doing so, he felt he should stand down as their candidate.

A source in Tory Central Office said that the donations amounted to less than pounds 50,000 and that it was highly unlikely that there was any connection between the donors and Mr Karadzic or the Bosnian Serb leadership.

Mr Hanley, the former Tory chairman, now a Foreign Office minister, said yesterday that he was "available to give any information I might have" to his successor's inquiry.

Meanwhile, in the Commons, the Prime Minister yesterday rejected Labour demands for an independent review of the rules on party funding.