Blair attacked over earlier donation from steel tycoon

Tony Blair was struggling to fend off new accusations of sleaze last night after a steel tycoon caught up in allegations of providing "cash for favours" to the Government was revealed to have donated money to the Labour Party in 1997.

Mr Blair told Downing Street officials yesterday he did not know Indian-born Lakshmi Mittal had given £125,000 to Labour two months before the Prime Minister wrote to his Romanian counterpart to back Mr Mittal's £300m purchase of the country's Sidex steel firm last year.

But the Tories claimed Mr Blair's defence did not "hold water" after news emerged that Ispat International (UK) Limited, a steel company owned by Mr Mittal, had given Labour at least £5,000, and possibly much more. That was listed in the party's accounts for the 1997-98 financial year.

Last night Channel 4 News showed footage of Mr Mittal at a London reception last year, thanking the Prime Minister for his help in sealing the Romanian deal and being congratulated by Patricia Hewitt, the Trade and Industry Secretary. Tim Collins, the shadow Cabinet Office minister, said: "This blows a hole in Mr Blair's case. It is reasonable to assume the Prime Minister should have known about the first donation."

Downing Street has revealed the events that led to Mr Blair writing to Adrian Nastase, the Romanian Prime Minister, last July. Mr Blair's official spokesman said the letter was recommended by Britain's ambassador in Bucharest and by the Foreign Office in London, which drafted the letter. Mr Blair signed it without changing it, an action that took "no more 30 seconds of his time."

Downing Street said it would be wrong to discriminate against British-based firms just because they had given money to a political party. It released the full wording of Mr Blair's letter, which said the proposed deal "should send a very positive signal to investors and businessmen in Britain and more widely ... I hope it will stimulate renewed interest by British business in Romania".

But doubts about the "Britishness" of Mr Mittal's LNM Group were raised because fewer than 100 of its 125,000 employees are in Britain. The company is registered in the Caribbean tax haven of the Dutch Antilles and Mr Mittal is an Indian citizen who lives in Hampstead.

The Opposition insisted Mr Blair should have been told about the two donations before signing the letter so he could avoid any appearance of impropriety. It called for an investigation by the Committee on Standards in Public Life. Mr Collins said: "This is part of a chain of a whole string of people, whether Bernie Ecclestone, Enron or the Hinduja brothers, giving favours to the Government and receiving favours in return."

In a letter to Sir Richard Wilson, the Cabinet Secretary, Mr Collins questioned the role of Jonathan Powell, the Downing Street chief of staff. He asked Sir Richard whether "there should be a clear distinction between party political fund-raisers and government officials and, if so, whether you believe it is appropriate for Mr Jonathan Powell to act as gatekeeper to the Prime Minister at the same time as soliciting donation to the Labour Party?"

Last night, Mr Mittal revealed in a newspaper interview that he had made his donation on May 23 in the run-up to the general election last year. Mr Mittal also said the contract with Romania had been won before Mr Blair's letter had been sent. "We qualified for the tender in 2000."