Cash-for-honours trail that leads to Number 10

Lord Levy, the Labour Party's chief fundraiser, has been arrested for a second time, increasing pressure on Tony Blair over the "cash-for-honours" affair.

Scotland Yard said the peer, known as "Lord Cashpoint", was detained on suspicion of conspiracy to pervert the course of justice when he answered bail yesterday for alleged breaches of the Honours (Prevention of Abuses) Act 1925 and the Political Parties, Elections and Referendums Act 2000. He was bailed pending further inquiries.

The dramatic twist led opposition politicians to compare the affair to the cover-up after the Watergate crisis, which led to the resignation of President Richard Nixon in 1974.

Lord Levy, who is also the Prime Minister's personal envoy to the Middle East, is the second close ally of Mr Blair to be arrested on suspicion of perverting the course of justice. Ruth Turner, Downing Street's director of government relations, was arrested at her home 12 days ago.

No 10 has insisted that it has co-operated fully with the Metropolitan Police during its investigation into claims that four businessmen who had lent money to Labour were in turn nominated for peerages by Mr Blair. It has denied reports that there is a second computer system at Downing Street, available to Labour Party staff, from which crucial e-mails may have been deleted.

Nobody has yet been charged. But the latest developments fuelled speculation at Westminster that charges may be brought over the more serious offence of conspiring to pervert the course of justice - which carries a maximum penalty of one year in prison - rather than the laws covering the sale of honours and the disclosure of party donors.

Lord Levy, who was first arrested in July, insisted again last night that he had done nothing wrong. "Lord Levy went to the police station today as asked," his spokesman said. "He was interviewed again. He completely denies any allegations of wrongdoing whatsoever. He left the police station in the early afternoon and since there is a continuing investigation he will not make any further comments at this time."

Angus MacNeil, the Scottish National Party MP whose complaint sparked the police investigation, said Westminster was "agog" at the latest development, which was "very serious indeed" for Downing Street. He added that the pace of the "crisis" appeared to be quickening. He said of Lord Levy: "This of course is the man who's been closest to Tony Blair in the whole fundraising escapade for Labour. And it really doesn't look good for Labour at all."

Ed Davey, the chief of staff to the Liberal Democrat leader, Sir Menzies Campbell, said: "Increasingly this sorry affair has the whiff of Watergate about it. For Nixon the crime was the cover-up, but we must await the result of the police investigation to see whether something similar is now happening in Downing Street. A key question is whether this can be sorted out before the Prime Minister leaves No 10 or whether this saga will dog him into his retirement."

Elfyn Llwyd, parliamentary leader of Plaid Cymru, who also lodged a complaint, said: "The net is tightening, and there will be further interviews and arrests. In my view the Prime Minister will be questioned again - possibly under caution." In December, Mr Blair became the first serving Prime Minister to be questioned during a criminal investigation.

There were renewed demands last night for Mr Blair to stand down " sooner rather than later". Lord Oakeshott of Seagrove Bay, the Treasury spokesman for the Liberal Democrats, said: "In any other organisation, the board would say 'Enough is enough, the chief executive has got to go'."

The Scotland Yard team, led by Assistant Commissioner John Yates, had been due to deliver its file of evidence to prosecutors by the end of this month. However, they warned that would no longer be possible after Ms Turner was arrested in a dawn raid.

Downing Street, which declined to comment on Lord Levy's arrest, hinted yesterday at a dirty tricks campaign over reports that No 10 officials were erasing e-mails relating to nominations for peerages. The Prime Minister's official spokesman flatly denied the reports and said the sources of the stories were wrong. In a show of anger, he hinted that the motivation was malicious. "You really have to start questioning who is spreading this information because it is wrong," he said.

He stopped short of directly accusing the police of a smear campaign, but rumours are circulating at Westminster that the reports follow leaks from police or prosecution sources.

ITV News reported that Labour members working as senior officials in No 10 had used a parallel computer system to send sensitive e-mails that the police could not detect when they swept the Downing Street system for information. Some of the e-mails had been erased.

Downing Street denied the reports, insisting that there was "no parallel e-mail system inside Downing Street". That left open the question of whether a separate system was being used outside Downing Street.

Tom Bradby, the political editor of ITV News, challenged the Downing Street spokesman yesterday to withdraw his denials. But the spokesman retorted: "There is only one system in use. The police have had complete access to all such transactions. People should question why they are being given wrong information."

Trail that leads to Number 10

8 March 2006 Chai Patel, the healthcare entrepreneur, protests to the vetting committee for Lords appointments after his nomination for a peerage is blocked. It emerges he lent Labour £1.5m.

16 March 2006 Jack Dromey, Labour's treasurer, reveals he was unaware of loans to the party, and rebukes Downing Street. The furore centres on four businessmen who gave Labour £4.5m in loans and were nominated for peerages.

21 March 2006 Scotland Yard says it is investigating cash-for-honours allegations. Labour says the loans were provided on a commercial basis, thus outside disclosure rules. Other loans, like donations, do have to be declared.

13 April 2006 Des Smith, a headteacher involved in finding sponsors for Tony Blair's city academies project, is arrested after reports that he linked investment with honours. He is the first of four people to be arrested.

22 June 2006 Lord Levy appears before MPs investigating party funding. It emerges he told Sir Gulam Noon that he need not disclose his loan on his Lords' nomination form. Sir Gulam retrieved the form because he had declared the payment as a gift.

23 July 2006 Lord Levy, Labour's chief fundraiser, is arrested for the first time. He says his arrest was "totally unnecessary". Two ministers, Lord Sainsbury of Turville, left, a party donor, and Ian McCartney, a former party chairman, are interviewed.

21 September 2006 The biotechnology boss Sir Christopher Evans, who lent Labour £1m, is the third person arrested. His £1bn business is linked to government initiatives.

14 December 2006 Tony Blair is interviewed, a month after Assistant Commissioner John Yates of the Metropolitan Police says he has 'significant and valuable' material from interviewing 90 people. He is questioned as a witness.

19 January 2007 Ruth Turner, director of government relations, is arrested on suspicion of offences under the Honours Act AND on suspicion of perverting the course of justice.

Yesterday Lord Levy is arrested again. And this time, he too is held on suspicion of perverting the course of justice, a much more serious issue as it relates to the question of a cover-up. It follows a spate of lurid stories, including suggeestions of the discovery of a "parallel" Downing Street e-mail system. Levy is again released without charge, and again rejects any wrongdoing.

The Future? Weekend reports suggest detectives discovered a note handwritten by Blair pertinent to the inquiries. It is denied, but the controversy is inside the heart of No 10, and shows no sign of abating. Any charges would no doubt hasten the PM's exit.

The men behind the investigation

John Yates Assistant Commissioner, Metropolitan Police

The police officer at the head of the inquiry is rapidly gaining a reputation as a fearless investigator and chief troublemaker for the Prime Minister.

An immensely experienced detective, the 47-year-old has been asked to handle some of the most difficult cases in modern policing, including the UK police's response to the Asian tsunami; the aftermath of the shooting dead of Jean Charles de Menezes; and a major police corruption inquiry.

In an apparent rebuff to government sources who accused him of being over-zealous, he was promoted to an assistant commissioner in December. He realises, as he is working under unprecedented scrutiny, he cannot afford to miss anything when he delivers his evidence file to the Crown Prosecution Service - expected in about a month.

Angus MacNeil SNP MP for Na h-Eileanan an Lar

Before 21 March last year, when the Scottish National Party MP Angus Brendan MacNeil, 36, complained to police that the Labour Party had contravened the Honours (Prevention of Abuses) Act 1925, little was known outside Scotland about the Gaelic-speaking backbench MP from the Hebridean island of Barra.

The former teacher who became the MP for Na h-Eileanan an Iar (Western Isles) on 5 May 2005, has risen to prominence because of his honest belief that it is illegal to sell honours.

But another factor was that he found himself out of pocket to the tune of £31,000 a year because he often had to stay overnight in a London hotel when his flights home to Barra were delayed. The rules prevent himfrom claiming a room on his MP's expenses.