Leading article: A scandal that reaches the very heart of power

The latest instalment of the cash-for-peerages saga is the most dramatic yet. In one sense, the arrest of Lord Levy under the 1925 Sale of Honours Act might have been expected. Everything that has emerged since the scandal came to light has pointed to his central involvement in soliciting loans for the Labour Party. And the revelation this week by Sir Gulam Noon that it was Lord Levy who instructed him not to disclose his loan to the House of Lords Appointments Commission should have been evidence that the net was closing.

But yesterday's news that Lord Levy had been detained by the Metropolitan Police was shocking nonetheless. It is, after all, not every day that one of the Prime Minister's closest confidants is arrested. And let no one be in any doubt about how close these two men are. Lord Levy is often described as Tony Blair's "tennis partner". But he was also the Labour Party's chief fund-raiser and the Prime Minister's personal envoy to the Middle East - a post that he retains to this day. Lord Levy is someone that the Prime Minister sanctioned to act on his behalf in Britain and abroad. It is small wonder that he once felt able to describe himself and the Prime Minister as "like brothers".

The suspicion must be that, after yesterday, this cosy arrangement will not survive. Downing Street initially refused to comment on the arrest on the grounds that the alleged sale of honours was a "party matter", presumably on the basis that the loans were paid to Labour to fight the 2005 general election, and not to the Government. After all his years of loyal service, Lord Levy might have hoped for a more supportive response.

Yet this Trappist response from Downing Street was not only unsupportive, it was grossly inadequate. Mr Blair, as well as being Prime Minister, is leader of the Labour Party. It is ridiculous to say that he has no responsibility for overseeing the finances of the party he leads. Much though he might like to, Mr Blair cannot distance himself from this affair. If Lord Levy is eventually charged with selling honours, there will inevitably be questions about whose authority he was acting on. He might claim that he was a free agent. Then again, he might not. According to such a scenario, it is not impossible that Lord Levy might decide he no longer has any obligation to protect anyone.

Whether or not charges are to follow, however, we already know enough about the Labour loans affair to conclude that it was a sleazy and disreputable business. Why else would these transactions be kept secret, not just from the general public but from the Labour Party treasurer, Jack Dromey? And even if it turns out that there was no agreement to confer peerages in return for hefty loans, the Government has no defence against the charge that it shamelessly tried to circumvent its own rules governing the transparency of political donations. This latest development merely adds to the impression of a government that - from the Ecclestone affair to John Prescott's Colorado adventure - has trampled all over its leader's early pledge to be "purer than pure" in office.

There has been much talk of late within Westminster of what the Government must do to "renew" itself in office. That is usually assumed to be a question of policy. But it has now taken on an unmistakably more serious dimension. The question has become how Labour can regain its moral authority and its reputation for probity. It is increasingly difficult to see how this can happen without the departure of the man who, for nine years, has presided over all these scandals and who saw fit to endow Lord Levy with such patronage.