Gordon Brown will announce radical moves today to loosen Labour’s ties with the unions to secure agreement for new party funding reforms, in an attempt to put the woes of this week behind him, The Times can disclose.

The Prime Minister will attempt to retake the moral high ground by tightening rules on trade union members funding the party, after it emerged that Labour had been taking illegal donations. The issue of union donation has been the sticking-point of cross-party talks intended to introduce a cap of £50,000 on single donations.

Meanwhile, the police officer in charge of the investigation into the David Abrahams affair is understood to have told Mr Brown to halt Labour’s own internal inquiry by the retired judge Lord McCluskey and Lord Harries of Pentregarth, the former Bishop of Oxford.

The pressure on Labour increased last night when Mr Abrahams claimed that he had told Jon Mendelsohn, Mr Brown’s chief fundraiser, in April about his use of third parties to donate money. Mr Mendelsohn said on Wednesday that he first learnt of the arrangement when he began working for Labour in September. However, Mr Abrahams said last night: “I always discussed the manner of my donations with the appropriate party officials and it was never suggested to me that I was doing anything wrong.

“I am not going to discuss particular meetings with particular individuals, save to confirm that Jon Mendelsohn discussed this method of donating money with me in April.”

Mr Mendelsohn dismissed the claims, saying: “This is completely untrue. I met Mr Abrahams at a charity dinner in April before I began working for the Labour Party. I did not discuss with him donations to the Labour Party, and did not discuss donating through third parties.”

Labour MPs were briefed last night on the funding reforms, which are to be presented at a policy event tomorrow. Plans include limits on spending outside election campaigns to end the injection by parties of large sums into marginal seats between polls. Mr Brown will ask the unions to support moves to require greater consent from individual members to give money to Labour. Unions will also be required to inform monitors annually of their numbers of levy-paying members.

It is far from certain that the move will satisfy David Cameron and it is sure to spark anger among union chiefs, Labour’s biggest donors.

The blame for how Labour came to be embroiled in a funding scandal again was yesterday laid at the door of the previous administration by Jack Straw, the Justice Secretary, when he said that it was a “matter of record” that the illegal donations had begun under Tony Blair. Mr Blair, however, is insisting privately that he, too, knew nothing about the cash gifts channelled through intermediaries, The Times has learnt.

Co Durham police may open a separate inquiry into how Mr Abrahams won approval for a £60 million business park on 540 acres of farmland. The project was blocked initially in late 2005 after objections were raised by the Highways Agency and Labour-run Durham County Council. Durham police said last night that “in the near future” senior officers would contact Chris Huhne, the Liberal Democrat MP, who expressed concerns to the Metropolitan Police.

Mr Straw raised questionmarks over the behaviour of Mr Mendelsohn as he told BBC Radio 4’s Today programme that only a handful of people had known about the donations.

The Conservatives have urged Mr Mendelsohn to resign because he admits that he knew about the arrangement with Mr Abrahams but accepted assurances from Peter Watt — Labour’s general secretary who resigned over the scandal — that the donations were above board.

In a further blow, Wendy Alexander, the Scottish Labour Leader and a close ally of Mr Brown, was clinging to her position, amid a row over an illegal donation to her leadership campaign. Ms Alexander wrote personally to Paul Green, a Jersey-based businessman, thanking him for a £950 donation that he made to her campaign in August. She maintains that the MSP who solicited the donation, Charles Gordon, had told her that it complied with the rules.

More questions than answers

How did the affair begin?
Last weekend it started to emerge that the Labour Party had accepted donations worth £650,000 from four individuals, including a builder and secretary, who had made contributions on behalf of David Abrahams, a millionaire businessman who wanted to keep his identity secret. Concealing the identity of donors is illegal under legislation passed in 2000

Who knew about the arrangement?
On Monday Peter Watt, the general secretary of the Labour Party, admitted he was aware of it and resigned. On Wednesday, it emerged that Jon Mendelsohn, Gordon Brown’s chief fundraiser, knew of the arrangement, but insisted that he had accepted assurances from Mr Watt that it was above board. Mr Abrahams said last night that he had told Mr Mendelsohn about the payments in April. David Cameron has called for Mr Mendelsohn to resign, while Jack Straw, the Justice Secretary, has questioned his “state of mind”.

Who else was offered money from Mr Abrahams or his associates?
Mr Brown’s leadership campaign was approached by Mr Abrahams. Chris Leslie, the campaign chief, took the call and was told that the businessman’s secretary, Janet Kidd, wanted to make a donation. He rejected the cheque because the campaign accepted contributions only from donors whom Mr Brown knew personally. Mr Leslie later suggested that Mrs Kidd donate to Harriet Harman’s campaign to make up a shortfall in its coffers, which was accepted. Mr Leslie and Ms Harman’s team say they were not aware that Mrs Kidd was donating on behalf of Mr Abrahams

Did anyone else have dealings with Mr Abrahams?
Hilary Benn has revealed that he was offered money by Mrs Kidd but turned it down. Baroness Jay of Paddington, a member of Mr Benn’s campaign team, was approached by Mr Abrahams and offered a cheque in Mrs Kidd’s name. She advised Mr Benn to turn it down because she feared that he was donating to more than one campaign. Mr Abrahams later donated to Mr Benn’s campaign under his own name

What questions remain?
Are there other donors who have used proxies? Was Mr Abrahams seeking to buy influence through the secret donations? Who first sanctioned the illegal arrangement – was it Mr Watt or one of his predecessors? Did Tony Blair or Lord Levy know of the arrangement? How many people other than Mr Watt in the Labour Party know? Why did Mr Leslie, the Brown campaign chief, not ask Mr Abrahams why he was offering donations in someone else’s name?

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