DOWNING STREET was accused yesterday of misleading the independent body that vets candidates for peerages after it failed to reveal that one of its nominees had made a loan of more than £1 million to Labour Party funds.

The House of Lords Appointments Commission is now engaged in an unprecedented stand-off, having refused to ratify three Labour nominees for the Upper House.

Downing Street, urged on by Labour Party fundraisers who fear that potential backers will be scared off by the prospect of being blocked, is in talks with the commission to try to overturn its objections.

The Times has learnt that relations have been soured further because the Labour leadership failed to disclose to the commission the loan from Sir David Garrard, 67, a property developer.

The body, set up by Tony Blair in 2000 to vet all Lords nominees so that they meet “the highest standards of propriety”, requires all political parties to declare any financial arrangements that are relevant to peerage nominations.

The Labour Party circumvented electoral law which states that anyone who gives £5,000 or more has to be identified. As the money from Sir David was in the form of a loan, at an unspecified rate of interest, but below that charged by high street banks, it is regarded as a commercial transaction and therefore does not have to be declared. In a statement to The Times, the commission said of the Garrard loan: “In vetting for propriety the commission would expect to be briefed on any relationship that could be seen to influence an individual’s recommendation.”

A Labour Party spokeswoman refused to be drawn on the financial relationship with Sir David, who lives for much of the year in a suite in the Mandarin Oriental Hotel in Geneva. “No political party publicly discusses its commercial financing,” she said.

The Prime Minister would provoke a significant political row if he overruled the watchdog for the first time.

One Whitehall source said: “I would not hold your breath that this will be resolved quickly. There is huge pressure being exerted on this from Downing Street. I am not even sure we will have this sorted by next week.”

Lord Oakeshott of Seagrove Bay, a Liberal Democrat Treasury spokesman in the House of Lords, said that Labour was deliberately misleading the commission. “If these loans are being considered in relation to peerages they should be declared as donations. It is as simple as that. The Labour Party has a continued financial arrangement with these donors which could be withdrawn at any time.

“We should be told the amount of loans that individuals have made and how much is still outstanding. Are loans repaid if people do not get peerages? Are they not repaid if people do get peerages? What interest rate is charged?”

A second Labour nominee Chai Patel, 51, the founder and chief executive of the Priory Group, which includes the celebrity rehabilitation clinic in South London, has also been blocked by the commission.

Dr Patel, who has publicly protested at the delay in ratification since the list of 11 Labour nominations was first made public, refused to be drawn on whether he had made an undeclared loan also. “Frankly, what I do with my own money is my own business,” he said.

Barry Townsley, 59, a financier, a third Labour nominee on the list of 29 working peers, has withdrawn after he was blocked by the commission.

Robert Edmiston, a millionaire car importer from the Midlands who gave £250,000 to the Tories in 2004, has also been blocked.

The commission, chaired by Lord Stevenson of Coddenham, the chairman of HBOS, has a duty to “satisfy itself that the person would be a credible nominee irrespective of any payments made to a political party”.

IN THE SPOTLIGHT

Sir David Garrard criticised after Allders employees’ pensions benefits were jeopardised when it entered administration. Was chairman of parent company. Backed Business Academy in Bexley. Knighted in 2003 for charitable services; gave £200,000 to the Labour Party in same year. In past gave £70,000 to the Tories

Chai Patel, 52, refuses to say if he made confidential donation to Labour. Cleared by General Medical Council after allegations of abuse at one of his care homes. Made two modest donations to Labour

Barry Townsley, 59, a financier, found guilty by Stock Exchange of misconduct in 1980s. Sponsored Stockley Academy, in Hillingdon

Robert Edmiston, 59, car importer, gave £250,000 to Tories in 2004. Chairs Midland Industrial Council, which donates to Tories. A top charitable donor: in 2004 he gave £27 million to Christian Vision

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