George Osborne is fighting for his political life because his behaviour in Corfu has contributed to the blackening of the name of Oleg Deripaska, The Times has been told.

Nathaniel Rothschild has acted against the Shadow Chancellor not only because he believed that he had broken the confidentiality of his conversations with Lord Mandelson; equally important was that in bringing the billionaire, Russia’s richest man, to public prominence he has damaged him at a time when he is facing a huge financial challenge.

Mr Deripaska has lost $10 billion (£6 billion) in the financial turmoil of recent months and is now being forced to find emergency funds with the world watching. Lurid details of his feud with a former business partner, Mikhail Chernoi, are also now public property.

The latest disclosure came as the Conservative leadership dismissed “wild speculation” that David Cameron might replace Mr Osborne as Shadow Chancellor with William Hague if the row refuses to die. But Tory MPs say that Mr Osborne needs to escape quickly from his difficulties. With Britain in a recession, and a crucial PreBudget Report imminent, they say that they need a Shadow Chancellor at the top of his powers and able to exploit the Government’s problems, rather than one looking over his shoulder at his tormentors.

Mr Chernoi is suing Mr Deripaska for £2 billion, or a 20 per cent stake, in Rusal, to which he says he is entitled for having helped him to take control of the Russian aluminium industry in the 1990s. A High Court judge ruled in July that the case could be brought in an English court, a ruling that is being appealed against by Mr Deripaska. The judge decided that it should not be held in Moscow because of the risk to Mr Chernoi of “assassination . . . or lack of a fair trial”.

Details were revealed in Sunday newspapers last weekend, including serious personal allegations against Mr Deripaska, and legal action has been threatened. The next day Mr Rothschild sent his explosive letter to The Times.

Sources close to Mr Deripaska and Mr Rothschild say that the leaking of Lord Mandelson’s conversation with Mr Osborne, in which he was said to have “dripped poison” about Gordon Brown, led to massive exposure for Mr Deripaska because of his links with Lord Mandelson, and that in turn encouraged journalists to search for details about the Chernoi case in court documents.

“It started with Mandelson and has spiralled crazily out of control. It is the last thing he needs at the moment,” a source close to Mr Deripaska said.

Mr Rothschild also earns some of his wealth from advising Mr Deripaska, although friends insisted that it was no more than 10 per cent of his overall fortune.

The row over whether Mr Deripaska offered, or was approached by, Mr Osborne in relation to a £50,000 donation to the Conservative Party has shed light on the extravagant lifestyles and intricate business connections of the men involved. It has also shown how much the men have suffered in the credit crunch.

Mr Rothschild’s Atticus Capital hedge fund has lost an estimated $7 billion since the start of the year. Like most hedge funds, Atticus does not reveal how much money it has or its investment performance. A spokesman declined to comment on the losses.

The value of Mr Deripaska’s business empire has also fallen. Rusal, the world’s largest aluminium producer, has seen the value of its one quarter stake in Norilsk Nickel fall from $13 billion to about $3 billion. Mr Deripaska’s share of that loss will be roughly $6 billion. Mr Deripaska lost a further $500 million this month when he was forced to give up a 9.9 per cent stake in Hochtief, a German infrastructure fund.

The situation could get worse in the next week as Mr Deripaska has to find $2 billion to refinance part of the debt that Rusal took on to buy the Norilsk stake. He may have to go cap in hand to the Kremlin for a bailout if he fails to raise the money, which may compromise his standing as one of Russia’s most powerful oligarchs.

The now infamous Corfu party attended by Mr Osborne was held on-board Mr Deripaska’s £80 million superyacht, which was moored near the Rothschild family estate. Both Mr Rothschild and Mr Deripaska are known to have multiple homes and they fly around the world in private jets looking for new investment opportunities, such as the resort for superyachts in Montenegro into which both men have put money.

Mr Rothschild and Mr Deripaska are friends but there is no suggestion that the latter urged the former to take action against Mr Osborne.

Friends of Mr Rothschild have declared an uneasy truce in the battle with the Shadow Chancellor over whether the latter tried to “solicit” a donation for the Conservative Party from Mr Deripaska. They say he has no wish to take the matter further “unless he is provoked”. That is the clearest warning to the Conservative leadership that if it challenges Mr Rothschild’s version of events again, he will again take on Mr Osborne. Friends say that there is a second witness of conversations in Corfu ready to sign an affidavit backing Mr Rothschild’s account if necessary. The second witness is understood to be a banker.

Mr Deripaska has no wish of further involvement. “He needed it to be be made clear that he never instigated discussions about a possible donation, as was at first alleged. That now seems to be accepted on all sides,” a source said.

Mr Cameron again defended Mr Osborne yesterday as a small number of Tory MPs privately suggested that he might have to move him, possibly to the party chairmanship, if the pressure failed to subside. Party officials said there would be no change. Asked as he campaigned in Glenrothes whether the Tories would stop dismissing Mr Rothschild’s version of events to avoid further retaliation, Mr Cameron said: “You can’t really have a financial scandal without any finance and that’s all there is to say about it.”

Asked whether he would sack Mr Osborne if it turned out that he had not been telling the truth, Mr Cameron said: “If my mother had wheels she’d be a bicycle.”

Meanwhile the elections watchdog rejected a new call for an inquiry into claims that Mr Osborne sought an illegal donation. Chris Huhne, the Liberal Democrat home affairs spokesman, wrote to Sam Younger, the Electoral Commission chairman, urging him to start an investigation or produce a clarification of the law to explain why the allegations against Mr Osborne fell outside his remit. But the commission said that it saw no reason to change its view that soliciting a donation that was not eventually made could not constitute a breach of the law.

The Liberal Democrat MP Norman Baker has written to John Lyon, the parliamentary standards commissioner, asking whether Mr Osborne’s stay in the Corfu villa of his university friend should have been entered in the register of MPs’ interests.

MPs are required to register any “pecuniary interest or other material benefit” with a value of more than about £630 “which might reasonably be thought by others to influence his or her actions, speeches or votes in Parliament, or actions taken in his or her capacity as a Member of Parliament”.

Mr Baker said: “I think it’s very important you establish the rules, not just for Mr Osborne’s case, but also Peter Mandelson and any other MPs who may have been involved in accepting hospitality from a third party.

“Here we have Mr Osborne accepting hospitality from someone who is a financier and investment adviser, who is in a position to potentially gain benefit from his discussions with the Shadow Chancellor. In those circumstances, Mr Osborne would be wise to register it.”

Mr Huhne said: “The Electoral Commission should launch an inquiry or clarify its interpretation of the law.”

Under the Political Parties Elections and Referendums Act 2000 it would have been illegal for Mr Deripaska to donate to a British party as he is not on the British electoral register.

A spokesman for the commission responded: “We have received a letter from Chris Huhne. Our position remains the same, that we have seen no evidence of any offence.”

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