LORD LEVY, the Prime Minister’s personal fundraiser, was arrested yesterday by Scotland Yard, as the “cash for peerages” controversy engulfing Downing Street escalated.

The move came only days after The Times disclosed that a senior Labour figure had told a businessman nominated for a peerage to hide that he had lent the party £250,000.

The arrest brings the most serious parliamentary corruption investigation in 70 years to Tony Blair’s doorstep and prompted speculation at Westminster last night that the Prime Minister would also be questioned. Downing Street said last night that it had no idea whether Mr Blair would be questioned.

Lord Levy, nicknamed Lord Cashpoint for his role in raising millions of pounds for new Labour, was arrested at lunchtime yesterday and questioned for several hours at a Central London police station.

Whitehall sources said that he was arrested because of a failure by senior Labour officials fully to disclose correspondence regarding loans accepted by the party and peerages offered in 2005.

“It appears that the voluntary process has not worked, and that is why the arrest took place,” a source said.

Prosecution sources said that the arrest of Lord Levy was part of the police process and would not necessarily lead to charges. In a statement Lord Levy accused police of using their arrest powers “totally unnecessarily”. A spokesman added: “He vigorously denies any wrongdoing.”

The £14 million in secret loans was known only to Mr Blair, Lord Levy and Matt Carter, the general secretary of the Labour Party at the time.

The arrest came as Labour began a determined attempt to show that its supporters have not been deterred from funding it by the row over loans and cash-for-peerages. It has taken out a full-page advertisment in The Times today in which named donors say that they are “proud to help fund the Labour Party”. The police moved against Lord Levy after The Times reported on Saturday that Sir Gulam Noon, the curry magnate, had been asked by an unnamed Labour Party official to remove details of his loan from paperwork to be submitted by No 10 to the Lords Appoinments Commission in support of his peerage nomination. Sir Gulam retrieved the papers from Downing Street and submitted them again without mentioning the loan. It was Lord Levy who made the telephone call to Sir Gulam.

No objection had been raised by the commission to his peerage until The Times revealed that Sir Gulam had made a secret loan to the party. The law requires that all loans to political parties be declared unless they are genuine commercial transactions with an agreed redemption date.Under the Political Parties Elections and Referendum Act 2000 the penalty for failure to provide information about donors is up to one year’s imprisonment. Under the 1925 Act, those convicted face a maximum jail sentence of two years.

Last night Downing Street was refusing to distance itself from Lord Levy, Mr Blair’s tennis partner and close friend, who will continue as the Prime Minister’s personal envoy to the Middle East.

Three other businessmen who made secret loans to the Labour Party have also had their peerages blocked by the scutiny committees.

Friends of Sir Gulam said that they were shocked by the arrest, despite their disappointment at Lord Levy’s behaviour towards the curry magnate. One said: “This arrest will bring the Labour Party’s actions, as well of those of Downing Street, into sharp focus.”

The backers of the advertisement in The Times include Sir Ronald Cohen, a businessman, Eddie Izzard, the comedian, Sir Alex Ferguson, the manager of Manchester United, and Patrick Stewart, the actor.

Lord Levy’s arrest is the second since the corruption inquiry began in March. Des Smith, a member of the Specialist Schools and Academies Trust, was arrested after he was secretly recorded by an undercover reporter apparently offering a range of honours.

David Davis, the Shadow Home Secretary, said: “Scotland Yard will have to question Tony Blair because he is at the top of the honours process.”

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