Sir Gulam Noon told The Times that he was specifically instructed not to mention the £250,000 loan because it was refundable and therefore circumvented funding rules.

Friends say that he has been hurt by the Labour Party’s lack of loyalty since the loan became public. He is the second of four blocked nominees for peerages to admit that they were advised by a senior Labour official to conceal a loan. Lord Levy, Tony Blair’s fundraiser, advised Chai Patel not to declare his loan to Parliament.

Speaking from Bahrain, Sir Gulam said: “I was advised by a senior party man, in a telephone conversation, that there was no reason why I should declare this loan because it was refundable. If I had been advised to declare it, I would have.

“I was also told by this same person that because there was interest on the loan, it was a commercial matter and would not come under the same party funding rules as a donation.”

Sir Gulam added that he had not been given a chance to explain the undisclosed loan to the Lords Appointments Commission, the body that has withdrawn its previous endorsement of his nomination. “The commission has never asked me whether I have ever lent any money to any party,” he said.

“It has only asked me about donations, and I have been completely open and honest. I am disturbed by what has happened and want to try and unravel this situation when I am back in Britain.”

His friends said that the failure of Labour officials had tarnished his reputation. One associate said: “He has been terribly let down by someone close to Blair, but he is still so loyal to Labour that, at present, he will not name names. He has been caught in a trap of Downing Street’s making. They created the problem, but have not explained what happened to the public. After the loyalty that he has shown to new Labour it feels like an almighty slap in the face.”

Moni Varma, a fellow Labour donor and associate of Sir Gulam, said that he had spoken openly about the money that he had given to the party. “There was no secret. I knew that he had given this amount; he spoke about it. The fundraising unit of the party should have declared this money. It is their responsibility.”

Sir Gulam, 70, known as the Curry King, arrived in Britain 36 years ago with £50 in his pocket. By the 1980s he had diversified into providing ready-cooked curries sold in shops, including Sainsbury’s and Marks & Spencer. His company now makes more than a quarter of a million curries a day. The Sunday Times Rich List puts his wealth at £65 million.

Throughout the Nineties, Sir Gulam was wooed by supporters of new Labour, according to sources. He has met Mr Blair and Lord Levy a number of times.

Sir Gulam has donated more than £220,000 to Labour since 1991. He was appointed MBE for services to the food industry in 1994, knighted in 2002 and has held positions on official bodies, including Transport for London. He owns a number of properties in Britain, including a family home near his factory in Southall and a flat in Swiss Cottage, northwest London.

Sir Gulam, a Muslim, has also been consulted by the Government over its response to the terrorist attacks. He said last year that he backed Mr Blair’s announcement to curb radical elements, and called for Muslim radicals to leave Britain.

“If people want to live in this country they must follow the rules, or it is right and proper for them to leave,” he said.

He has previously maintained that he had not been approached about a peerage but had always given donations to political parties as a way of “giving something back to the country”.

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