The election watchdog is considering referring Peter Hain to the police over his failure to declare more than £100,000 in donations, The Times has learnt.

Mr Hain’s prospects of clinging on to political office darkened last night as he was accused by an authoritative source of showing “contempt” for the laws on political funding. The Electoral Commission began an investigation into the Work and Pensions Secretary after he admitted last week that he had failed to declare properly £103,000 in gifts to his failed deputy leadership bid.

The watchdog now faces a stark choice between letting him off without punishment or recommending a criminal prosecution if it finds that he broke rules on when donations should be reported.

The scale of the donations, as well as Mr Hain’s claim that he was too busy to ensure that the rules were followed properly, have increased significantly the likelihood that it will seek to make an example of him.

Although insisting formally that it is in the “initial stages” of its inquiry, the Electoral Commission will not wait for a second, parliamentary, inquiry to be held before deciding whether to call in the police.

John Lyon, the Parliamentary Commissioner for Standards, confirmed yesterday that an investigation was under way. It will now fall to Mr Lyon to make a ruling on whether Mr Hain should have listed the cash gifts in the Register of MPs’ Interests.

Mr Hain’s efforts to cling to his position in Government were dealt a further blow yesterday when a Labour MP said that Mr Hain should resign and be “ashamed” of his errors. “[MPs] are very aware of the rules of the game, and it really surprised me that, running for deputy leader, you are not also aware of the problems and make sure you do not get into messes like this,” Ian Gibson, the MP for Norwich North, said. He added that by channelling some of his donations through the Progressive Policies Forum think-tank, a body that appears to have no staff and has published no policy papers, Mr Hain and his campaign team had given “think-tanks a bad name”.

“To play a game like this, whoever’s idea it was, is just quite revolting to me. If I was in his position, I think I would resign. I think I would feel ashamed I had let the side down.”

Earlier David Cameron attempted to add to the pressure on Mr Hain despite the questions that have emerged over the Tories’ own funding arrangements. He said that Mr Hain should submit to questioning in the “court of public opinion”.

Gordon Brown has signalled that Mr Hain’s future depends on the outcome of the investigations by the Electoral Commission and the Parliamentary Commissioner for Standards.

His spokesman insisted that Mr Brown had “full confidence” in his minister. “Obviously there are these inquiries ongoing and I think all he’s saying is he’s not going to preempt the outcome of those.

“The Prime Minister has set out his views on Mr Hain’s performance as a minister. He thinks he’s doing a good job. I’m not going to get into the realms of what reports that haven’t reported yet may or may not say.”

£100k to give?

Labour

1 The donor can give it to the party or to a constituency association. Cash cannot be given to support a minister in his or her government role.
2 If the donor wants to put money in the party account, it is given to Labour HQ’s fundraising department. If accepted, it is declared to the Electoral Commission.
3 If the donor gives it to a minister’s constituency, the minister must declare it in the Register of Members’ Interests and to the Electoral Commission, and tell his or her department’s permanent secretary.

Opposition parties

1 The donor can give it to the party’s general account, ask the party to give it to an individual or give it to the individual’s constituency association.
2 If the donor wants the money to be passed to a specific frontbencher, he or she informs the treasurer.
3 If the party agrees, the treasurer’s office has to register the donation with the Electoral Commission.
4a For some frontbenchers, such as David Willetts, money is put into the bank account of individual offices and entered in the Register of Members’ Interests.
4b For some members of the Shadow Cabinet, such as George Osborne, the funds go into Conservative HQ coffers to pay for salaries, pamphlets and research and are not available to the Shadow Minister. In Mr Osborne’s office, the money paid eight staff and the Tax Reform Commission in 2006. It is unclear whether this should be declared in the Register of Members’ Interests

Times Recommends

• Tower block death blaze ‘suspicious’
• Licence payers fund BBC chief's £8m pension
• Potter star falls victim to swine flu