Veterans of Rothschild hospitality know to pack at least half a dozen items of swimwear when invited to stay on the Corfu estate.

Staff remove discarded shorts and bikinis for laundering so efficiently that guests can quickly find themselves short of suitable poolside attire.

An invitation to the Rothschild villa, in an exclusive area known locally as Kensington, could, for some, be intimidating. But for George and Frances Osborne the prospect of spending the rest of their holiday with their old university friend was, while welcome, also expedient. The Shadow Chancellor, his wife and their two children, together with their housekeeper, had already spent a fortnight on the island.

With Mr Osborne having to break his holiday – to make a speech on poverty in London – it made sense for his wife to have the company of Nathaniel Rothschild and the collection of financiers and their families.

When Mr Osborne resumed his holiday, however, there followed three days in which the worlds of high politics and business would collide to spectacular effect. The weekend’s encounters were supposed to remain private. Mr Rothschild’s fury that they did not was disclosed by a letter to The Times.

That prompted a welter of claim and counterclaim as each side presented its version of events yesterday. All agree that the story started on Friday, August 22, with an invitation to a drinks party on the Queen K, a super-yacht belonging to the Russian oligarch, Oleg Deripaska. Mr Rothschild is an adviser to the oligarch and runs the Atticus hedge fund.

There was little to suggest the storm ahead as the three Oxford friends waited at the landing stage that afternoon. Presently a 24ft wooden tender pulled alongside to take Mr Rothschild and the Osbornes to the yacht. It was not the only boat in the bay: other craft of visiting friends included that of Rupert Murdoch, chairman of News Corporation, owner of The Times.

We know from Mr Osborne’s account that he had previously met the oligarch at the Davos World Economic Forum in Switzerland. Also at that encounter was Peter Mandelson, then European Trade Commissioner. While the precise nature of their relationship is unclear, it is increasingly obvious that Lord Mandelson and the Russian oligarch have substantial links. So as the Osbornes stepped on to Mr Deripaska’s £80 million yacht it would have not come as a particular shock to see Mr Mandelson.

The talk, Mr Osborne says, was of Russian and British politics. After the party – thought to have lasted about an hour – the group gathered at Mr Rothschild’s table for dinner.

The next night, August 23, Mr Mandelson and Mr Osborne met for a second meal, this time at the nearby Agni taverna. It was a partial version of this encounter that found its way into the newspapers, which reported that the soon-to-be-appointed Business Secretary had “dripped poison” about Gordon Brown.

Mr Osborne – who has been blamed for leaking the story – was clearly focused on politics. But it is the events of the next day that have become the most controversial.

Faced with accusations that he had solicited a donation from Mr Deripaska, the Shadow Chancellor yesterday released an account in which he sought to deny that allegation and another claim that methods of “channelling” the money from a foreign businessman could be achieved to accord with UK electoral law. According to the official Conservative account, Mr Osborne does not deny that he sought from Mr Rothschild an invitation for Andrew Feldman to visit the villa that Sunday. The Tories’ chief executive and fundraiser also has a villa on the island and so was near by. Mr Osborne emphasises that it was a “social invitation” and that Mr Feldman and Mr Rothschild had met once before.

Friends of Mr Rothschild say that he and Mr Osborne discussed the possibility of Mr Deripaska making a donation to the Tory party that day before meeting the tycoon. They describe it as a “detailed conversation” that involved discussion of whether it would be against the rules for Mr Deripaska to make a financial contribution since he is not a British citizen.

“The idea was mooted that Mr Deripaska could make the donation through a UK company he controls, LDV, which is based in the Midlands and makes commercial vehicles,” according to one account informed by friends of the banker.

The Osborne account then insists that “Mr Rothschild suggested to Mr Feldman that his friend, Mr Deripaska, could be interested in making a party donation. Mr Feldman made clear that there are very strict rules on donations to political parties in the UK. He explained that there are only two ways of giving a political donation. Firstly, if you appear as an individual on the UK electoral roll. Secondly, if the donation comes from a legitimate UK trading company. At this point Mr Rothschild said that Mr Deripaska owned UK trading companies including Leyland Daf. There was no discussion about how a donation could be concealed or channelled.”

The Conservative account also suggests that it was Mr Rothschild’s idea that the party then visit Mr Derispaska on his boat but does not deny that Mr Feldman and the Shadow Chancellor readily agreed. “They stayed on the boat for about an hour and drank tea. There was no conversation or mention of party funding or the possibility of Mr Deripaska making a donation to the Conservative Party.”

Last night, however, Mr Rothschild directly challenged that version of events, insisting that the question of a donation had been raised in front of Mr Deripaska and alleging that Mr Osborne had discussed further the question of a donation over dinner that night.

Heaping further pressure on the Shadow Chancellor, his former friend named a fellow guest, James Goodwin, as a witness prepared to testify to the accuracy of his account. In a statement he said: “On August 24 at my house in Corfu, Andrew Feldman, George Osborne and I discussed the prospect of donation by Leyland DAF, a UK company controlled by Mr Deripaska, before we went on to Mr Deripaska’s boat. This conversation took place in the presence of another of my guests, James Goodwin. Mr Goodwin recalls that the subject of a donation by Mr Deripaska’s UK company also arose briefly while we were on the boat, but the conversation gained no traction.

“At dinner at my house later that evening, the subject again came up in conversation, and Mr Osborne was interested in whether and how such a donation could be secured.

“The next time the issue arose was during a phone call between Mr Feldman and me in mid-September. I was left with the impression that the Conservative Party remained interested in pursuing it.”

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