Gordon Brown was on his way to Leeds last Friday for a meeting about the plight of Britain’s 6m unpaid carers when he took a call from Peter Hain.

The beleaguered work and pensions secretary was brisk and businesslike. He was irritated that his staff had got him into such a mess over his finances, he said. Obviously, he had never intended to break any rules.

He promised he would sort the fuss out quickly. He had put arrangements in place immediately to pay back £25,000 lent to his Labour deputy leadership campaign by a friendly diamond dealer. And he had called the parliamentary standards commissioner to say he would be happy to cooperate with an investigation into an official complaint by the Tories.

The pensions secretary is said to have put his phone down buoyed by Brown’s assurances that, while any official investigation must be allowed to take its course, he did not doubt Hain’s version of events and that he saw him as a man of integrity.

But the prime minister, who had hoped to put last year’s political funding rows behind him when he relaunched his premiership this month, privately has a ruthless calculation to make.

As damning detail mounts up of Hain’s failure to keep his campaign finances within the rules, is he too valuable to lose? Or should Brown follow the example of Tony Blair, who had no compunction about shedding embarrassing ministers even when, like Peter Mandelson, they were his friends?

“Hain the pain” – as he was nicknamed in his days as an anti-apartheid campaigner and Young Liberal in the 1970s – was yesterday at his home in Wales, consulting his close advisers and desperately fighting for his long and sometimes controversial political life.

Standing in his garden, he read a defiant statement to the press, apologising for bad administration of political funds but saying it was “absurd” to suggest he had been involved in a cover-up of donations.

Will this be enough to persuade Brown to save him?

Hain's standing in the party was reflected by his poor fifth in the deputy leadership contest despite the reckless spending that has got him into trouble. He has a penchant for left-wing posturing that has won him no friends in Downing Street.

As the hue and cry continues, Brown might decide that such a figure is less of a danger outside the cabinet.

A former minister commented: “There’s a lot of people in the party who think he’s a little too openly ambitious. All politicians are ambitious and have their eye on the future. For most politicians that’s a given – you put it in the bank and forget about it. For some reason, that’s still in people’s minds about Peter. It’s a bit more explicit than for most people.

“That’s probably because of where he came from – his journey from the Liberals to being a left-wing firebrand. People always wonder when people make that sort of political journey. I think that’s probably where the suspicion comes from.”

There was widespread surprise when, on coming to power last summer, Brown promoted Hain from the outer darkness of Northern Ireland secretary to run work and pensions, a key department in the Brownite agenda. Insiders say the prime minister was reluctant to sack the man who had described himself as an “umbilical cord” to the socialist wing of the party.

“He’s not close to Brown,” said the former minister. “I suspect that Gordon felt he had to put all the deputy leadership candidates into the government, with the exception of John Cruddas [the backbench left-wing candidate] . . . I think that’s probably the reason why Peter is still there.”

What, though, are the charges against Hain? He has fallen foul of the rules on political funding that Labour itself brought in, and his case is compounded by the involvement of a “think tank” that appears to have existed only as a channel for donations to the minister. As a result, he faces a potentially damaging series of inquiries that could result in his suspension from the Commons.

He has already admitted to breaching antisleaze rules by failing to disclose to the Electoral Commission £103,155 in donations. This came on top of the £82,000 previously declared by his failed campaign to succeed John Prescott as deputy Labour leader.

The electoral commission is now checking Hain’s donations. Sir Christopher Kelly, chairman of the committee on standards in public life, has also said he will look into the matter. And John Lyon, the parliamentary standards commissioner, has received a formal complaint from David Davies, the Welsh Tory backbencher, that Hain broke Commons rules by not entering the donations in the register of MPs’ interests.

Hain claims he had no intention of keeping the donations secret but simply slipped up in failing to follow disclosure rules because he was so busy with his government duties.

However, the role of an obscure think tank, the Progressive Policies Forum (PPF), has not been fully explained. Some £51,000 of loans and donations to Hain’s campaign had come through the PPF, including those from Willie Nagel, an 83-year-old diamond dealer, and Isaac Kaye, a healthcare entrepreneur.

Hain said that last June and July, when it emerged that his campaign was in financial trouble, he “approached PPF”, which donated money to his campaign “with the permission of individual donors”.

It seems peculiar, however, that Hain should speak of approaching PPF when the think tank – which has done little in its year-long existence but channel money to Hain’s campaign – is run by John Underwood, one of the key aides in his deputy leadership bid.

There have been suggestions it was simply being used as a front organisation to enable donors to stay anonymous. These were heightened with sources close to the Hain camp saying yesterday that early in the campaign both Nagel and Kaye were asked to donate direct but declined as they did not want their names publicised.

There have also been contrasting claims that the anonymity came at the behest of some of Hain's team, to help preserve his image as a union man and not overdependent on tycoons' cash.

Donors to the think tank say they were approached for funds by Hain’s staff in the final weeks of his campaign, as debts began to pile up. Only weeks later they were asked if their money could be given to Hain directly.

Christopher Campbell, 72, a former chairman of British Shipbuilders, who gave the think tank £1,990, said he believed he had been approached by Steve Morgan, Hain’s campaign director, in June about giving funds to the PPF. Only weeks later in “early July” he was asked if the funds could be transferred to Hain's coffers.

According to insiders, the original budget for the Hain4 Labour bid was close to £90,000. Until April, Taylor was the chief strategist of the campaign, but that month the cabinet minister decided to bring in an old friend an ally, Steve Morgan, a PR man, to run the bid.

Morgan, who claims John Kerry and Hillary Clinton, the Democrat senators, among his former clients, has a reputation as a slick-talking salesman. Taylor quit soon afterwards, irked by the direction the campaign was taking into expensive, American-style publicity.

The splits in Hain’s team have persisted, with staff now locked in recriminations.

One MP who was involved said: “I just can’t believe they spent that much.” A friend of Hain said he felt “personally betrayed” by aides, but would “carry on and clear his name”.

Peter Kilfoyle, the former defence minister, said he should consider his position: “The majority of backbenchers will be depressed and perturbed . . . It certainly does reflect very, very badly on Peter Hain.”

Additional reporting: Jack Grimston, Marie Woolf and Dipesh Gadher

The donors: from diamond broker to demolition man

WILLIE NAGEL The former diamond broker, known as the “doyen of de Beers”, paid Hain’s campaign a £5,000 donation plus a three-month loan of £25,000. Now 83, Nagel worked in the diamond industry for more than 40 years. When Hain served as minister for Africa, he worked closely with Nagel on developing the Kimberley process of certificates to halt the trade in conflict diamonds.

ISAAC KAYE Kaye, 78, who gave Hain nearly £15,000, is the former chairman of Norton Healthcare, a pharmaceuticals company investigated by the police over accusations of price rigging of drugs sold to the NHS. Two years ago the company made an out-of-court settlement of £13.5m to the NHS after being implicated in a cartel along with six other firms.

STEVE MORGAN The Welsh-born lobbyist, brought in to manage Hain’s office during the campaign, donated £5,000 through the think tank Progressive Policy Forum. Morgan, who previously worked alongside the MP George Galloway, has said he was parachuted in to “bring order to the chaos” left by others earlier in the campaign. Phil Taylor, Morgan’s predecessor in Hain’s campaign, has said all donations had been registered before Morgan took over.

MIKE CUDDY Four months before the head of the Welsh demolition business Cuddy Group gave £10,000 to Hain’s campaign, the work and pensions secretary praised the company in a press release on his website and posed for a photograph with Cuddy. The company has strenuously denied any link between the donation and Hain’s commendation of it.

BILL BOTTRIELL The millionaire entrepreneur gave £15,000 at the start of Hain’s campaign, plus a further £5,000 that was declared last week. Bottriell, 50, who amassed his fortune from an online recruitment company, once paid £1,700 for a guided tour of No 10 Downing Street, auctioned by Cherie Blair to raise funds for her sons’ school, the London Oratory.

PATRICK HEAD Head, who gave £2,000 to the Hain camp, was co-founder of the Williams Formula One team and technical director at Williams Grand Prix engineering for more than 25 years. Another of the company’s co-founders, Frank Williams, is said to be close to Hain, who was taken to the Italian Grand Prix by the team in 1999.

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