A wealthy Labour donor arrested over loans-for-peerages allegations today spoke of his shock and dismay and made a strong defence of his innocence.

Sir Christopher Evans, the founder of Merlin Biosciences, said that if he had thought he would be placed in "this embarrassing and mind-boggling position" he would never had made the loan.

He was questioned yesterday at a police station outside London by officers from the Metropolitan Police's Specialist Crime Directorate. He lent the Labour Party £1 million between January and May last year.

A Scotland Yard spokeswoman said he was later released on bail, pending further inquiries.

In a written statement, Sir Christopher, said that he voluntarily attended the police interview, which contained nothing that caused him or his solicitor any concern or to think that he had done something wrong.

"I have done nothing wrong and have absolutely nothing to hide," he said.

He had been twice honoured by both Conservative and Labour governments for his work in medical biosciences, and he said that was the only basis on which he would accept an honour.

From the outset he said he made it clear that the loan would be a commercial, interest-bearing loan, to help Labour with their cash flow during the last election campaign, and was to be repaid in full.

He added: "Frankly, if I thought for one moment that I would be placed in this embarrassing and mind-boggling position, I would not have made the loan."

Sir Christopher is the first party donor to be arrested as part of a police inquiry that began in March. The other two arrested men — Lord Levy, the Prime Minister’s personal fundraiser, and Des Smith, a former government adviser — have been bailed. However, Lord Levy has been questioned for a second time by detectives. The Prime Minister’s Middle East envoy again faced a number of queries when he answered bail at a police station in Central London yesterday.

Sir Christopher was one of a group of wealthy backers who lent Labour a total of £14 million to bankroll the party’s election campaign. A police investigation has been launched into allegations that some of the other lenders were offered peerages in return for their support.

In March last year Sir Christopher was appointed to the UK Stem Cell Initiative, set up by Gordon Brown, the Chancellor, to advise Government on cutting-edge medical technology.

Later Mr Brown and Tony Blair were named as backers of the UK Stem Cell Foundation, a charity set up by Sir Christopher to fund research into stem cells, which advocates believe could lead to treatments for conditions such as Parkinson’s and Alzheimer’s.

Sir Christopher’s support for Mr Blair dates from the late 1990s, when he began giving substantial donations to Labour. He was knighted in 2001, having been appointed OBE in 1995 for services to biotechnology. Merlin Biosciences, which Sir Christopher founded, is under investigation by the Serious Fraud Office, which is looking into claims about the misappropriation of £2.5 million of company funds. Sir Christopher and Mark Clement, a fellow director, deny wrongdoing and that funds are missing. Sir Christopher has previously denied any impropriety regarding the £1m loan.

Lord Levy, Labour’s chief fundraiser, was first arrested in July in connection with the investigation into whether peerages were offered in return for financial support to parties. He was later released on bail, pending further inquiries.

There were calls at the time for him to be sacked as the Prime Minister’s personal representative in the Middle East.

There was also widespread speculation that Mr Blair himself might face questioning over allegations that Labour-supporting millionaires were nominated for peerages in return for making huge loans to the party in the run-up to last year’s General Election.

Lord Levy, who does not draw a salary but has an office in the Foreign Office, had been keeping a low profile following his arrest but in August he appeared to resume his duties when he met Israeli government ministers. Earlier this month he accompanied Mr Blair on his visit to the Middle East.

Angus MacNeil, the Scottish National Party MP whose complaint led to the police inquiry, said: "This is a significant development and again justifies my decision to report this matter to the police. Let us not forget that, in total, 80p of every £1 of individual donations to the Labour Party come from people who have been honoured. I hope this investigation goes the whole way in cleaning up Parliament."

SNP leader Alex Salmond added: "It is essential that the Prime Minister is questioned, as the only person in the Labour Party who can authorise these honours is Mr Blair himself. On this issue, all roads lead to Downing Street."