Honours police 'likely to return to Levy' after Blair is questioned

Senior Labour sources last night said they believed the spotlight of the Metropolitan Police's "cash for honours" investigation would now fall on Labour's chief fundraiser Lord Levy after the two-hour grilling of Tony Blair at Downing Street.

The Prime Minister's allies were confident Mr Blair would not face further questions, but there was growing speculation that Lord Levy could face a third session of questioning.

Lord Levy, who is Mr Blair's envoy to the Middle East, was last night in Israel preparing to accompany Mr Blair for part of a tour of the region. Mr Blair's spokesman said the Prime Minister believed Lord Levy had an "important role to play" there.

If the police decide to interview Lord Levy for a third time, it is unlikely to happen until the New Year. He is expected to spend Christmas in Israel. Friends of Lord Levy said he had done nothing wrong.

Lord Levy was arrested on 12 July and interviewed under caution. He was questioned a second time on 20 September and his bail is due to be renewed shortly, when police may choose to interview him again.

The police inquiry is believed to be focusing on a conversation between Lord Levy and Sir Christopher Evans, the biotech millionaire who loaned Labour £1m. Sir Christopher was arrested for questioning a day after the police interviewed Lord Levy for a second time. Some Labour lenders have said Lord Levy suggested loans rather than donations, which had to be declared.

The Treasury last night accused others of trying to smear the Chancellor by dragging him into the scandal. In a statement by his official spokesman, the Treasury denied media claims that Mr Brown sought honours for two friends, Sir Ronald Cohen, a businessman, and Wilf Stevenson, a director of the Smith Institute. The claims were raised this week on Channel 4.

"At no point, until loans were made public, did the Chancellor have any knowledge of any loans to the Labour party, and in relation to fundraising, whether loans or donations, he has always considered it inappropriate for him in his position as Chancellor to have involvement," said the statement. It said Mr Brown knew Mr Stevenson and Sir Ronald "and he respects their service to public life and has no hesitation in saying they would have made valuable working peers".

Earlier, Mr Blair was asked in Brussels whether he felt "ashamed" to be the first serving Prime Minister to be interviewed by police during a criminal investigation.

He replied: "This is a complaint that was made by the Scottish National Party against me personally, in effect, and so it is not in the slightest bit surprising," adding: "The particular issues concerned were not for honours given by me as a prime minister for public service. On the contrary, they were nominated by me as a party leader for party service, in the way that other party leaders are entitled to do."

The Liberal Democrat leader Sir Menzies Campbell called for reform of political funding and of the House of Lords. "It is essential we reform political funding and the House of Lords so as to ensure that the link between generosity and preferment is irretrievably broken," he said.