The Labour party game

Gordon Brown failed to distance himself yesterday from the scandal over Labour's secret donations amid growing speculation that it would soon be the subject of a police investigation.

The controversy moved closer to 10 Downing Street when it emerged that Jon Mendelsohn, who was appointed as Labour's chief fundraiser by Mr Brown, had known for weeks that the property developer David Abrahams gave huge donations to Labour through intermediaries. Labour had previously claimed the only party figure who knew about the arrangement was Peter Watt, who resigned as its general secretary on Monday.

The Tories and Liberal Democrats called on the Prime Minister to explain why he had not asked Scotland Yard to investigate what he admitted was an unlawful action. Mr Brown, who was put on to the defensive during Prime Minister's Questions in the Commons, said it was up to the Electoral Commission to decide whether to bring in the police. The Tories challenged that view last night.

MPs believe the launch of a second police investigation into Labour funding is only a matter of time. In July, the "cash-for-honours" inquiry which destabilised Tony Blair's government ended with no one being charged. The latest allegations are seen as more clear-cut and could be studied much more quickly than the 13-month inquiry in which Mr Blair was questioned. If there is a new inquiry, Mr Brown could become only the second serving Prime Minister to be questioned during a criminal investigation.

Mr Mendelsohn's involvement undermined attempts by Brown allies to portray the scandal as one stemming from the Blair era. Although the secret donations of 600,000 date back to 2003, 312,000 has been given since Mr Brown became Labour leader.

The mystery about who knew of Mr Abrahams' disguised donations deepened when Jack Dromey, the Labour treasurer, said he was in the dark about them and added that there had been "complete concealment". His wife, Harriet Harman, accepted 5,000 from one of Mr Abrahams' intermediaries for her deputy leadership campaign.

Opposition parties accused Labour figures of passing the buck and urged Mr Brown to take responsibility. Chris Grayling, the shadow Work and Pensions Secretary, said: "Last time I looked, Gordon Brown was leader of the Labour Party. Doesn't that mean the buck has to stop with him?"

Chris Huhne, the Liberal Democrat environment spokesman, who has asked the Metropolitan Police to intervene, said: "It does look as though everybody is trying to dive behind the sofa and pretend they were not anywhere near what was going on. That is precisely why the inquiry set up by the Prime Minister is not likely to get anywhere and why a police inquiry is essential."

Mr Mendelsohn said he was "unhappy" about the donations because they did not meet his "strict transparency test". He wanted to meet Mr Abrahams to tell him his method of giving money was unacceptable but he was assured by Mr Watt that the arrangement was legal.

The former general secretary denied a claim by Mr Abrahams that a letter he sent to him last Thursday was a request for more money, insisting it was designed to fix a meeting. But the Tories demanded Mr Mendelsohn's resignation and an explanation of why he did not tell Mr Brown or the Electoral Commission about the secret donations as soon as he discovered them.

Mr Brown defended Mr Mendelsohn in the Commons but had to endure a tricky 30-minute question session dominated by the affair. The acting Liberal Democrat leader, Vince Cable, told the Prime Minister he had gone "from Stalin to Mr Bean" in a matter of weeks and was "creating chaos out of order rather than order out of chaos".

For the Tories, David Cameron said Mr Brown's explanation "beggars belief", adding: "We have had 155 days of this government. We've had disaster after disaster. A run on a bank, half the country's details lost in the post and now this. His excuses go from incompetence to complacency and there are questions about his integrity. Aren't people rightly asking now, is this man simply not cut out for the job?"

The Prime Minister hit back by pointing to Mr Cameron's role on "Black Wednesday" in 1992, when he was a special adviser to the Chancellor, Norman Lamont. He said Mr Mendelsohn had "absolutely no involvement" in the Abrahams donations, which had been coming in for four years, and pledged that Labour would do "everything in our power" to ensure it followed acceptable standards on fundraising. "We are ready to take any further measures... so that everything in party politics is above board, including the use of third-party sources for donations," he added.

Ms Harman's friends said she was a "victim" and being made a scapegoat for the acceptance of proxy donations by Mr Watt. Her allies were also angry with Hilary Benn's deputy leadership campaign team for not having alerted her to the "dodgy" nature of the gift offered by Mr Abrahams' secretary Janet Kidd, which they refused. Ms Harman accepted 5,000 from Ms Kidd once her campaign was over.

"[Harriet] was pretty desperate to clear her debts from the campaign," said one friend. "She is still around 15,000 to 20,000 in debt from the campaign."

It emerged that Mr Abrahams was a member of the "1,000 Club" of Labour donors who were regularly "squeezed" for cash by the party's former chief fundraiser, Lord Levy. Mr Abrahams said he had been made to feel like a "serial criminal" when he was in fact a "serial philanthropist".

Last night the row moved north of the border as the Scottish Labour leader, Wendy Alexander, was engulfed in questions surrounding a donation to her recent leadership campaign.

In a statement after approaches by The Herald newspaper, Ms Alexander said the Electoral Commission was being kept informed about the donation, which she denied returning and which she said amounted to less than 1,000. The Labour leader in Scotland denied the donation was illegal as the businessman was named by Labour as Paul Green.

Read Andrew Grice's online column at independent.co.uk/todayinpolitics

The Labour fundraiser at the centre of the row...

"Jonny" Mendelsohn was urged by the Opposition toresign after it was revealed that Labour's director of general election resources sent David Abrahams what appeared to be a begging letter. Despite being absolved of any blame by Gordon Brown, who appointed him and yesterday defended him on the grounds that he had only been in the job since September and that the donations had been going on for four years, Mr Mendelsohn's reputation has taken a severe knock.

He had known for at least a month about the irregular payments by Mr Abrahams with whom he had fallen out years before and he is likely to face questions over why he did not tell other senior Labour figures, such as the party's treasurer, Jack Dromey. Although he is a friend of Lord Levy, Labour's chief fund-raiser under Tony Blair, Mr Brown had hoped to signal a clean break with the previous regime by bringing in his own man to look after party donations. In particular, he wanted to draw a line under the "cash for honours" affair in which Lord Levy was involved.

Enter Mr Mendelsohn. He was seen in the Brown camp as a safe pair of hands with business experience and a fat contacts book. "He is a man of great integrity," Geoff Hoon, Labour's chief whip, said yesterday. Now, the 40-year-old finds himself at the centre of a storm similar to the one that engulfed Lord Levy as it emerged that he was told last month that the property developer Mr Abrahams had given money to Labour through intermediaries.

It is not the first time that Mr Mendelsohn has been embroiled in controversy. After working as an adviser to Mr Blair from 1995 to 1997, he joined forces with other former Labour aides, Neal Lawson and Ben Lucas, to set up an "ethical lobbying" firm, LLM. Following the "cash for questions" scandal which undermined John Major's government, LLM was accused of offering "cash for access" after one of its lobbyists allegedly boasted: "We can go to Gordon Brown if we have to." They denied any impropriety in an affair dubbed "Lobbygate".

Mr Mendelsohn now insists he was unhappy about the lack of transparency over the donations and was determined to end the arrangement. He also had doubts about Mr Abrahams, with whom he had argued when they were both involved in the Labour Friends of Israel pressure group. Mr Abrahams gave money to the group but was expelled after the row. He refused Mr Mendelsohn's request for a meeting.

Mr Mendelsohn's letter to Mr Abrahams could be interpreted as a request for more money (as Mr Abrahams sees it) or an attempt to set up a meeting so that he could end the donations (as Labour claims). But Mr Mendelsohn faces questions over why he delayed taking action over Mr Abrahams and why he did not tell Mr Brown or the Electoral Commission about the secret donations immediately.

Andrew Grice

... and the other names in the frame

Gordon Brown

Fought Cameron to a draw at Prime Minister's Questions. May be down, but not out for the count. It has been an appalling fortnight: Northern Rock, the missing discs, and now sleaze. But there is a growing mood of determination. He acted quickly, and heaped the blame for the "proxy" donations on Peter Watt, the general secretary of the party, who has resigned. Brown is badly wounded, but is convinced Labour will come good against the Tories with the economy.

Jack Dromey

The treasurer of the Labour Party has been made to look impotent. He blew his top in March 2006 when he discovered Labour had been accepting loans from donors proposed for honours by Tony Blair without telling him. Now he is angry again at being kept in the dark about Abrahams' use of proxy donors in breach of the electoral rules. Being out of the loop, he could not warn his wife, Harriet Harman, who took one of the "dodgy" cheques.

Harriet Harman

The chairman of the Labour Party is the most vulnerable. She could take the blame. She took 5,000 from Janet Kidd, Mr Abrahams' secretary, which had been refused by Hilary Benn. Her friends say one reason was her desperation to clear debts from her successful campaign for the deputy leadership. She spent 46,701 but is said to be 15,000 to 20,000 in the red.

Hilary Benn

The only person to come out of "Proxygate" smelling of roses. Refused the 5,000 cheque from Ms Kidd for his deputy leadership campaign, after Baroness Jay told him it was a "proxy", but took a cash donation from Mr Abrahams himself. Some are saying he should have blown the whistle.

Baroness Jay

The former leader of the House of Lords is being blamed by friends of Ms Harman for not informing her team that the cheque from Ms Kidd was "dodgy".

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