Blair will consider party funding by state

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Why should the taxpayer make up the shortfall if big donations are banned?

Tony Blair is to consider the introduction of state funding for political parties in an attempt to halt the tide of allegations that the Government granted special favours to businesses giving money to Labour.

Charles Clarke, the Labour Party chairman, is to talk to the other political parties to see if a common line can be agreed to limit the inevitable controversy over handing millions in taxpayers' money to the main parties each year. He is to raise the issue shortly with David Davis, his Tory counterpart.

The Prime Minister, who has always feared a public backlash over the issue, is being urged by cabinet ministers and senior Labour officials to launch a debate on it. They are worried that Labour's decision to change the law to force all parties to disclose donations has rebounded, because, as the governing party, it faces closer scrutiny.

The concern has been heightened by a spate of recent revelations, including the £36,000 of sponsorship money paid to Labour by Enron, the collapsed American energy giant, and the £125,000 donated by Lakshmi Mittal, a steel magnate, shortly before Mr Blair wrote a letter backing his £300m bid for Romania's state-owned steel company.

The Electoral Commission, the independent body that supervises elections in Britain, is expected to launch an inquiry into state funding before the next general election. Both main parties are grappling with financial problems from last year's election, with Labour believed to be £5m in the red and the Tories losing as much as £300,000 a month.

Iain Duncan Smith, the Tory leader, is believed to oppose state funding. One aide said the idea would be "deeply unpopular" and "anti-democratic" if the scale of cash grants was based on the number of votes a party won at the previous general election.

Supporters of state funding say a system could be devised that encourages the parties to engage more closely with voters. For example, they could receive £5 from the state for every £1 raised from party members. Another measure is a cap on individual donations.

Yesterday the Tories kept up the pressure on Mr Blair over his intervention – after a request by the British ambassador in Romania – on behalf of Mr Mittal. They seized on Downing Street's defence that it was normal practice to back British businesses in this way.

Michael Ancram, the shadow Foreign Secretary, tabled Commons questions asking how many British embassies submitted requests for the Prime Minister and other ministers to endorse commercial contracts.

Reports last night suggested that Mr Mittal was described as a friend of Mr Blair in a draft of the letter to the Romanian Prime Minister. The reference was not contained in the final letter sent to Adrian Nastase.

Downing Street declined to comment on the claims last night. ?[Mr Blair] signed the letter put before him,? said a spokesman.