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In a further twist, it emerged that both Mr Nagel and Mr Kaye donated via a third party – a virtually unknown think-tank called the Progressive Policies Forum (PPF).

This morning the Financial Times claimed that Mr Nagel, who had become acquainted with Mr Hain while he was Minister for Africa, was approached by John Underwood, Labour's former communications director, to give money to Mr Hain's campaign but did not want his name to be made public.

The newspaper claims that Mr Underwood later asked Mr Nagel to donate to PPF, which was described as a think-tank pursuing worthwhile policy causes. He gave £5,000 and also made a three-month loan of £25,000, which the FT says is due to be repaid by this weekend. The newspaper claims that Mr Nagel was not told the money he gave to the PPF was going to be diverted to Mr Hain.

A statement issued by Mr Nagel's his solicitors, Ashurst LLP, later said he was happy to donate to Mr Hain. “Mr Nagel donated and loaned money to PPF and had no objection that this money be used to support Peter Hain’s campaign,” it said.

Expert View

In the long term, Peter Hain’s career in Government looks over

Greg Hurst, Political Correspondent of The Times

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The donations bring the cost of Mr Hain’s deputy leadership campaign to £185,000 – about twice the budget of the winner, Harriet Harman. He came fifth out of six candidates in the race.

In last night's statement, the Cabinet Minister said he did not set out to deliberately mislead. "There is no legal impediment to a person donating money on behalf of someone else. The PPERA [Political Parties, Elections and Referendums Act 2000] legislation expressly permits it in paragraph 6 of schedule 7," he said.

"What is important is that the person or company making the payment informs the donee (in this case, Peter Hain) that it is on behalf of someone else and gives particulars to the donee so that the donee can report them."

Mr Hain tried to explain the scale of the sums involved by saying that he had been forced to continue fundraising after the campaign ended last June "as a result of unpaid invoices coming to light during the summer and autumn".

He became aware of the unregistered donations on November 29, in the week that Labour became engulfed in a row over secret donations that led to the resignation of Labour’s general secretary, Peter Watt. The donations are being investigated by police.

Mr Hain said: "I reasonably believed that the arrangements in place for my deputy leader campaign would be sufficient to ensure compliance with reporting requirements, but as it transpired, due to administrative failings this was not the case after early May."

Labour backbenchers were said to be sympathetic to Mr Hain today, but figures close to Gordon Brown were furious that the public's focus had once again been moved away from policy and back to sleaze.

"Peter Hain was clearly more interested in campaigning - getting out and winning the campaign - and performing his ministerial duties, than the mechanics and organisation of his campaign," a former Labour election coordinator told Times Online

"I think he took his eye off the ball. As I understand it, he did not appoint a campaign manager until well into his campaign. This is obviously a serious error of judgment. Clearly he had other priorities, but there are important legal requirements surrounding donations."

Asked if Mr Hain would lose his job over the saga, he added: "This is serious. It is no good saying: 'I am sorry.' It is a serious breach of the rules."

The inquiry by the Parliamentary Standards Commissioner will specifically deal with whether the Work and Pensions Secretary complied with the rules of the Commons, rather than electoral law. Under Commons rules, Mr Hain should have declared donations in the Register of Member’s Interests within four weeks of receiving them.

His statement last night said he became aware of unregistered donations on November 29. Yet, the latest edition of the Commons register, published on January 9, makes no mention of the 17 additional donations.

Once Mr Lyon has assembled the facts, he will write a report with recommendations on what steps to take which is submitted to Commons Standards and Privileges Committee. It is MPs on this committee who ultimately will decide Mr Hain’s fate, which could include being handed a lengthy suspension from the Commons.

In addition to the Standards Commissioner's inquiry, the Electoral Commission will now conduct its own checks into whether the donations were permissible under electoral law, and consider further action.

Mr Hain had 30 days to consider whether to accept any donations and a further 30 days to register them. The commission does not currently have powers to take action against individuals rather than parties simply for late reporting, but officials said that other sanctions might be available.

Downing Street said that Mr Brown continued to back the Cabinet minister today. "The Prime Minister has full confidence in Peter Hain," a Number 10 spokeswoman said.

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