'It leaves a nasty taste': Tory party turns fire on Osborne

Pressure was mounting on George Osborne yesterday to answer allegations that he solicited an illegal £50,000 donation from a Russian oligarch. The Prime Minister also demanded a formal investigation into the claims.

Although the shadow Chancellor is confident he will survive the storm, senior Tories questioned his judgement in meeting Oleg Deripaska in Corfu this summer.

One frontbencher said: "It leaves a nasty taste. And it doesn't help us in the current economic climate to look like a party of the rich." Lord Tebbit, a former Tory chairman, said: "George Osborne should remember that those who sleep with dogs will get fleas. Personally, I would not be comfortable in the company of Russian oligarchs."

Gordon Brown surprised MPs at Prime Minister's Questions by describing the allegations against Mr Osborne as "a very serious matter indeed", adding: "I hope that it is investigated by the authorities."

Despite his intervention, there was little sign that the shadow Chancellor will face such an inquiry. The Electoral Commission said it had no intention of starting an investigation because soliciting a donation that was not eventually made could not constitute a breach of the law. "No one has presented any evidence to the commission that an offence has been committed," it said.

Labour MPs challenged that ruling, saying it could be an offence to try to disguise a donation. They pointed to a discussion in Corfu while Mr Osborne was present over whether money could be given by UK companies owned by Mr Deripaska. Denis MacShane, the MP for Rotherham, said he would seek an inquiry by the commission unless Mr Osborne cleared up the unanswered questions about his role in the affair. He told the shadow Chancellor in a letter: "It is likely there will be issues for the Electoral Commission or other authorities to investigate."

The Tories dismissed the letter, saying Mr Osborne had already answered all the points in it. They accused Mr Brown and Mr MacShane of "a desperate attempt to keep this story going". They also called on Lord Mandelson, the Business Secretary, who was staying on Mr Deripaska's yacht at the time, to set out a detailed account of all his dealings with the Russian tycoon.

Tony Wright, the Labour chairman of the Public Administration Select Committee, said: "We are not talking about corruption. We are not talking about law-breaking. What there is... is a twerp and a massive misjudgement, I'm not sure which authorities Gordon thought he was talking about."

Allies of Mr Osborne said Mr Brown's call for an inquiry had backfired because it was now clear there was nothing to investigate. A Cameron aide said: "Why is Gordon Brown's office not able to say what sort of investigation he wants and by whom? And why isn't he calling an investigation into Lord Mandelson's relationship with Mr Deripaska as well?"

Liam Fox, the shadow Defence Secretary, said Mr Brown was demanding an inquiry to distract attention from the economic problems. "This attention being given to what is little more than Westminster tittle-tattle is really quite confusing to people worrying about whether their homes are going to be repossessed and whether they will keep their jobs," he said.

Tim Montgomerie, the editor of the Conservativehome website for activists, said: "I don't like George Osborne's choice of holiday companion – nor briefing against Peter Mandelson after a private dinner – but Conservatives should not be under any illusions that Labour hates George Osborne and would love to bring down our master strategist."

The Deripaska Affair: The key questions

What's all the fuss about?

Nathaniel Rothschild, a financier and old friend of the shadow Chancellor, George Osborne, claims he and the Tories' chief fundraiser, Andrew Feldman, were present in Corfu in August when the possibility that Russian billionaire Oleg Deripaska might donate to the party was discussed.

Did the Tories do anything illegal?

The Tories decided a donation would be "inappropriate". Labour MPs claim the 2000 Political Parties Elections and Referendums Act makes it an offence to "facilitate" a disguised donation by an illegal donor. Mr Rothschild claims Mr Feldman suggested a donation be "channelled" through one of Mr Deripaska's British companies. Mr Feldman denies any discussion about concealing a donation.

Will there be an official inquiry?

Gordon Brown pressed for one yesterday. But the Electoral Commission can't look into something that did not happen.

*How many times was it discussed?Mr Rothschild says a donation was mentioned three times, including during a dinner at his Corfu villa on 24 August attended by Mr Osborne. The Tories say a donation was mentioned only twice – and that the discussion was initiated by Mr Rothschild – but a donation was not discussed at the dinner.

What will happen next?

Mr Osborne is reserving his position, but is unlikely to take legal action. His (former?) friend Mr Rothschild is prepared to have their dispute settled in court and claims to have two witnesses.