$100m loan extended for tycoon who funded Labour in 'cash for favours' row

The Government has quietly approved a seven-year $100m (£65m) European loan to the wealthy Labour donor Lakshmi Mittal.

The revelation yesterday of ministerial backing for a European Bank of Reconstruction and Development (EBRD) loan to help the Indian billionaire invest in the Sidex steel plant in Romania threatens to reignite the "cash for favours" row that has dogged Tony Blair.

Mr Blair came under fireearlier this year after he signed a letter of support for Mr Mittal's bid for the plant. Labour had a £125,000 donation from Mr Mittal.

Officials at the Department for International Development (DfID), with the support of Clare Short, the Secretary of State, backed the seven-year extension to an existing one-year loan. In September, John Kerby, the British director on the board of the EBRD, voted in favour of the extension after instructions from the DfID.

The EBRD gives loans at commercial rates to projects most City banks regard as risky to invest in. The decision to extend the loan went directly to the Secretary of State because of its controversial nature. Clare Short backed her officials' decision to approve the loan and instruct the British EBRD board members to vote for it.

A spokeswoman for the department said officials made the decision based on "normal procedures" and "came to the decision internally" but "it went to the Secretary of State in this case for a final decision".

The EBRD said last night that at its board meeting on 18 September it had agreed on the loan to Mr Mittal's Ispat-Sidex company. Sources said Britain had backed the loan and only the US had disagreed. "They have a $100m-a-year working capital facility," a spokesman said. "It was rolled over into a more permanent facility and the interest rate went up."