THE Attorney-General is considering action against the money-raising appeal set up by George Galloway which is at the centre of allegations that he was bankrolled by Saddam Hussein.

As the Labour MP began legal action for libel over the claims that he had received £375,000 a year from the Baghdad regime, The Times has learnt that Lord Goldsmith, QC, is studying a separate complaint against him. It is based on an article in The Times showing that Mr Galloway promised to spend all the money raised by the Mariam Appeal on treating sick Iraqi children, but later used it to fund his travelling expenses.

The Mariam Appeal is highlighted in the purported Iraqi intelligence documents found in a Baghdad ministry that appear to show that the MP received the equivalent of £375,000 a year from Saddam’s oil revenues.

Mr Galloway’s future as a Labour MP was on the line as his party announced an inquiry into the “extremely serious” allegations.

But the MP for Glasgow Kelvin unleashed a media offensive against the claims, which were based on papers allegedly found in the wreckage of the office of the Iraqi Foreign Minister.

An alleged confidential memorandum sent to Saddam by his head of intelligence suggested the MP had asked a secret agent for a greater share from the Oil-for-Food programme. But Saddam rejected the alleged request from Mr Galloway as unaffordable, it was reported last night. A letter that The Daily Telegraph claims was sent from Saddam’s chief aid to senior party figures says: “The belief is that . . . even using Western methods (he) needs exceptional support which we cannot afford and I do not think we can promise to do that if we consider it according to our policy.”

Describing the papers as a forgery and a smear, Mr Galloway announced that he had instructed solicitors to issue a claim against The Daily Telegraph, which printed the allegations.

Charles Moore, Editor of the Telegraph, said: “We stand fully behind our story.” He said the paper “gave Mr Galloway full opportunity to answer the issues raised”. He said he had not received a statement of claim from the MP.

Mr Galloway has been one of the Government’s greatest critics over Iraq. The allegations, if true, would finish him as an MP, but within the Government, Labour and the Conservative Party, there was caution over accepting the claims at face value.

The Foreign Office, which is responsible for the intelligence services, said that it would “welcome sight” of the papers found by the Telegraph to enable its experts to study them, words that suggested that it had no independent corroboration of the allegations.

In a carefully worded statement Ian McCartney, Labour’s chairman, went out of his way not to prejudge what he said were serious allegations.

Mr Galloway is already being investigated by the party over remarks made on Abu Dhabi television describing Tony Blair and President Bush as “wolves” who were attacking Iraq. Even before yesterday’s bombshell it appeared likely that over the next few weeks Hilary Armstrong, the Chief Whip, would propose the withdrawal of the whip from Mr Galloway, thus preventing him being reselected as a Labour candidate. He said that he will stand as an independent for Glasgow Central should this happen. His current seat will disappear due to boundary changes at the next election.

Mr Galloway, speaking to The Times from Portugal, where he is on holiday, said that he had never solicited nor accepted any financial assistance from the Iraqi regime.

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