Third man arrested in peerage scandal

A third man has been arrested in the "cash for peerages" scandal, the latest development in an affair that is threatening to overshadow next week's Labour Party conference.

It was reported last night that the arrested man was Sir Christopher Evans, the founder of Merlin Biosciences and one of the 12 millionaire lenders who gave Labour nearly £14m in loans.

Downing Street made it clear that Tony Blair was not involved, but the arrest will have cast a cloud over the Prime Minister who will find his final days in office being dogged by the corruption allegations.

The police also reinterviewed Lord Levy, a close friend of the Prime Minister, and the chief Labour fundraiser, who was arrested in June. They earlier arrested and bailed a head teacher, Des Smith, 60, who was involved in finding sponsors for Labour's city academies after it was claimed in a newspaper "sting" he boasted that honours would be given to multi-million pound investers in the projects.

Lord Levy, who denies any wrongdoing, was questioned for a second time at a London police station, and bailed to return at a later date. He raised £13.9m in loans by 12 millionaire businessmen but that has contributed to the debts which the party was told yesterday now totals £29m.His spokesman said: "Lord Levy returned as requested to meet the police today to help them with their ongoing investigation."

When he was first arrested there were calls him to be sacked from his role as Mr Blair's representative in the Middle East, despite not having been charged with any offence. However, he accompanied Mr Blair on his visit to the Middle East earlier this month.

The 12 lenders included Rod Aldridge, head of the IT support firm Capita, which has benefited from multi-million pound public-sector contracts, Sir David Garrard, whose nomination by Mr Blair for a peerage was blocked by the Lords Appointments Commission, Richard Caring, a clothing tycoon and owner of the London restaurant The Ivy, and Lord Sainsbury of Turville, the science minister, who each lent £2m.

The police insisted that their inquiry was also extending to the Conservative Party, but it is understood that the man arrested yesterday was one of the 12 Labour donors.

The Metropolitan Police refused last night to name the third man to be arrested, but said he had been interviewed outside London and had been bailed pending further inquiries under the 1925 Honours (Prevention of Abuses) Act, which was introduced after David Lloyd George was accused of selling honours.

Mr Blair is expected to be interviewed by detectives from the special Metropolitan Police unit under John Yates, a deputy assistant commissioner, as part of the inquiries into the allegations that peerages may have been awarded to businessmen who funded Labour's election campaign and made major donations to the city academy projects.

Lord Levy is alleged to have told Sir Gulam Noon, the so-called curry king, he did not need to disclose a £250,000 loan to Labour on his nomination form for a life peerage, which Mr Blair was prepared to propose.