The Cash-for-Questions Affair: Major rocked as payments scandal grows: Minister resigns over 'cash for questions' PM reveals he knew of allegations by Harrods owner three weeks ago

Tony Benn: 'Unless this is stopped we shall be moving towards the death of the democratic process.'

Andrew Marr: 'A backwash of greed, media prurience and broken rules from the Eighties is big enough now to swamp the Government and send it down. Page 19 THE GOVERNMENT was rocked yesterday by a fresh scandal when the Northern Ireland minister, Tim Smith, resigned after he admitted receiving fees for asking parliamentary questions on behalf of Mohammed Al Fayed, the owner of Harrods.

As a second minister, Neil Hamilton, in charge of corporate affairs at the Department of Trade and Industry, refused to quit and issued a libel writ over similar allegations, John Major told a stunned House of Commons that he had ordered the Cabinet Secretary to investigate the new 'cash for questions' claims three weeks ago.

Despite Mr Hamilton's denial that he had accepted payments for the same purpose as Mr Smith, he came under pressure to go as some colleagues suggested he would serve Mr Major better by stepping down and fighting to clear his name from the backbenches.

The latest crisis for the Government took an extraordinary turn yesterday when Mr Major further disclosed that the allegations had originated from Mr Fayed and that the Prime Minister had made it clear in response that he was 'not prepared to come to any arrangement' with the owner of House of Fraser.

The allegations had been put to him by an 'intermediary'.

With MPs inferring immediately that that meant Mr Fayed had sought a favour from Downing Street, Mr Major's office refused to elaborate on his reference to an 'arrangement' beyond saying he had simply made it clear that while the allegations had been brought to him privately, there would be a formal inquiry and that the results might have to be made public.

It was common gossip in Westminster last night that a member of the Fayed family has applied for British citizenship, although there was no confirmation that this was linked with any 'arrangement' proposed to Mr Major. Downing Street was at pains to stress that Mr Major had not imputed any suggestion of blackmail to Mr Fayed or his intermediary.

Later a spokesman for Mr Fayed denied the businessman had asked for any 'arrangement' with Mr Major about the allegations. 'There was no approach to Downing Street. We asked the Prime Minister for nothing and there was never any arrangement suggested by ourselves,' the spokesman said.

The circumstances that prompted Mr Major to order the Cabinet Secretary, Sir Robin Butler, to undertake his inquiry did not detract from the Tory turmoil. As the Opposition prepared to step up its campaign against government 'sleaze', Tony Blair, the Labour leader, told Mr Major: 'Your government is becoming tainted.'

Sir Robin's inquiry, which he began early this month with Chief Whip Richard Ryder is said to have covered allegations going wider than Mr Smith and Mr Hamilton and involving other Tory MPs, including ministers. But there was little expectation in government circles that there would be any need for further resignations when Sir Robin completes his report in the next few days. The results will be made public.

Mr Hamilton is said by ministerial sources to have repeatedly and convincingly denied, during a series of grillings by senior whips, allegations that he accepted payments through the firm of Ian Greer Associates for asking questions on Mr Fayed's behalf.

Mr Hamilton, MP for Tatton, Cheshire said in a statement issued by the libel lawyers Peter Carter-Ruck & Partners: 'There is no truth in the allegations in today's Guardian that I received payments from Ian Greer on behalf of Mohammed Al Fayed in return for asking parliamentary questions or for any other action. I shall be issuing a writ seeking an injunction and damages today.'

Mr Hamilton was said by members of the government to have admitted taking a free holiday with his wife at the Ritz in Paris, owned by the Fayeds. After this was made public, the holiday was the subject of correspondence between the Commons' Members Interests Committee and Mr Hamilton, though there was no formal investigation. Downing Street indicated yesterday that Sir Robin had been satisfied there was no case for re-opening that issue.

Mr Greer yesterday denied all the claims and said he would take legal action over the allegations.

In reply to Mr Smith's letter of resignation, the Prime Minister said that while he was 'grateful' for the Beaconsfield MP's 'clear and full explanation, none the less it was clearly wrong . . .'

Mr Blair said the Commons Privileges Committee should 'broaden and deepen' its inquiry into 'cash for questions' allegations against two MPs and meet in public.

(Photographs omitted)