Labour needed to find cash fast to help to pay the bills and to service the bank loans that one leading accountant estimates cost £1 million year. Lord Levy was the obvious man for the job.

Michael Levy began raising money for Labour under John Smith but became the party’s chief fundraiser after meeting Tony Blair in 1994.

Born in the East End, he left school at 16 to become an accountant. He set up Magnet Records, which became a huge commercial success through acts such as Alvin Stardust and Chris Rea.

What attracted Mr Blair to the man known as “Labour’s chequebook” was his success in raising funds for a small charity called Jewish Care. Under his guidance, it grew to an annual budget of £36 million. Mr Blair asked him to do the same for Labour.

His prowess at fundraising earned him a place in the inner circle, as Mr Blair’s tennis partner and his special envoy to the Middle East, as well as a frequent guest at Chequers. It also won him a peerage in 1997 — the first of a number of big-name financial helpers of Labour to reach the Lords.

Lord Levy’s knack for finding big donors meant he was never far from controversy. He was linked to Bernie Ecclestone, the Hinduja brothers and Lakshmi Mittal, all donors who ended up in the headlines for the wrong reasons. The bad publicity was beginning to put people off.

But while donations were becoming harder to come by, all three men targeted for “soft” loans last year had shown their willingness to donate to the party.

Barry Townsley, a financier who invested £1.5 million in a city academy, agreed to lend £1 million; Chai Patel, the founder of the Priory clinic, made a £1.6 million loan; and Sir David Garrard, a property developer who gave £2.5 million towards an academy, lent the party £2 million.

The imperative for loans was different; although Labour will not admit it, its credit worthiness with banks was probably stretched to the limit and loans were needed urgently.

The party accounts for 2004 show that it has £12 million of debt. Bank loans account for £4.3 million, while overdrafts and short-term loans are put at a further £6.7 million.

Mr Blair admitted yesterday that he knew the three known “loaners” had helped Labour with its coffers when he recommended them for peerages. He denied that this was a factor in putting their names forward and insisted that they would have made valuable peers — even though the row has led Sir David and Mr Townsley to withdraw their nominations.

But Mr Blair offered no explanation for the breakdown in communications that left Jack Dromey, the party treasurer, unaware of the loans deal struck by Lord Levy. Labour sources insist that Matt Carter, who was then general secretary and who resigned last year, was the official accounting officer and that he knew all about the loans. He was unavailable for comment yesterday.

Mr Blair, asked if he had made a mistake, said: “If you look back on the events of the past few months, yes, I think it is clear it would be more sensible if loans were treated in the same way as donations.”

He added: “If someone supports the Labour Party financially, that’s not a reason to put them in the House of Lords, but it isn’t a reason not to put them in the House of Lords.”

He acknowledged Mr Dromey should have been told about the money: “Of course he should have known.”

Charles Clarke, the Home Secretary, insisted that peerages had not been offered in return for loans and he defended Lord Levy.

“The allegation is completely incorrect. The suggestion [that] there was cash for peerages, which is a suggestion that is in widespread currency, is completely false,” he said.

“It is not the case. Lord Levy does not behave in that way. Obviously the independent procedures that this Government has established is entitled, and does, investigate allegations of that kind.

“But it would be quite improper if there was a cash for peerages situation and that is not the case and that is not the way that Lord Levy, or indeed the Labour Party generally, operates.”

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