Blair 'one of two ministers who knew of cash-for-honours'

Tony Blair is one of only two cabinet ministers who knew the party agreed to accept secret loans from rich supporters, Scotland Yard's "cash for honours" inquiry is to be told.

The only other minister who knew was Ian McCartney, the former Labour chairman, who gave "party authority" to the system of loans but strongly denies knowing who made them.

There is growing alarm in Labour circles that Mr Blair could become the main focus of the Metropolitan Police inquiry, amid speculation that a Downing Street staff member is proving "extremely helpful" to the investigation.

Mr McCartney, now the Minister for Trade, signed certificates when four businessmen who had provided loans were nominated for peerages, saying they had not donated money to the party. He is adamant that this was not a misleading statement because he did not know they were lenders at the time.

The latest twist in the Metropolitan Police inquiry could leave Mr Blair dangerously isolated. Some Labour insiders believe the Prime Minister may have been the only politician to know that the four businessmen had a financial relationship with Labour when he nominated them for seat in the House of Lords.

The police have written to all ministers in the Cabinet at the time of last year's general election apart from Mr Blair, who is expected to be interviewed by detectives shortly. The other ministers, including Gordon Brown, the Chancellor and Mr Blair's likely successor, and John Prescott, are likely to tell Scotland Yard they did not know about the loans.

Mr McCartney has already been questioned, and is believed to have told police he was unaware the four businessmen had lent money to the party when he signed their nomination forms from a hospital bed while waiting for emergency heart surgery last year.

Alan Milburn, who headed Labour's election effort, has said he was told during the campaign the party had taken out "a lot" of loans.

A source with knowledge of the police inquiry said: "Only two ministers knew when a system of secret loans was set up. One was Ian McCartney, who gave the party's authority for it. The other was Tony Blair."

The Prime Minister has said he takes "full responsibility" for Labour's decisions but insisted that he did not nominate the four men for peerages in return for their loans.

Blair allies are worried that there is a "media agenda" to goad the police into interviewing the Prime Minister. If he is interviewed, he is reported to want the session to take place away from Downing Street to avoid humiliating television pictures of the police entering No 10. It could be held in his Commons room or at his Chequers country residence.

Alan Johnson, the Secretary of State for Education, admitted yesterday that the investigation was damaging Labour. He told journalists at Westminster: "Is it doing us damage? Of course. You do not want to see this kind of thing being written up. There is absolutely no one in the party who would not prefer this was not happening.

"I don't think there is anything at the core of this. We will wait for the end of the police investigation. I have have had my letter and sent my reply. We will have to live with it until we get to the end of the road, which I hope will be soon."

He insisted that philanthopists donating money to the Government's flagship city academies scheme were not seeking honours in return. He said: "The individuals I have seen, most want to be anonymous. They generally come from a poor background and have managed to make something of their lives. The thought they are doing it for a peerage does not ring true. they are doing this for the best of reasons."