Cash for honours: What am I bid? £10,000? £1m? A loan, no questions asked?

People who gave thousands got knighthoods. Those who gave millions became peers. As new revelations about cash-for-honours increase the pressure on Tony Blair, Marie Woolf asks: just how sleazy is Labour?

The cash-for-honours scandal deepens today amid revelations that three businessmen whom Tony Blair had recommended for peerages had lent money to the Labour Party.

The Independent on Sunday has been told that the men at the centre of a row between Downing Street and an independent watchdog have made loans as well as donations to Mr Blair's party.

Dr Chai Patel, founder and chief executive of the Priory Group, is understood to have lent money to Labour, along with Sir David Garrard, 67, a millionaire property developer.

The two men were on a secret list of those nominated by Mr Blair that was leaked to the IoS. A third, the millionaire stockbroker Barry Townsley, asked to be withdrawn from the list after it was revealed that he was among nominations for peerages being blocked by the House of Lords Appointments Commission. It was also revealed last night that he lent money to the party's funds.

Now it has emerged that the watchdog is angry that the Prime Minister failed to come clean about the fact that Dr Patel and Sir David had given loans as well as donations to help swell the party's coffers when their names were put forward.

This newspaper has established that Mr Blair is considering backing down and replacing his most controversial nominees with "substitute" names. Downing Street is said to be ready to start a "dialogue" on a new list to head off the growing scandal.

The emergence of the reason behind the watchdog's deep unease opens yet another front in the rash of sleaze accusations threatening to taint the final stage of Mr Blair's administration. The first indication that the commission was blocking the Prime Minister's recommendations came late last year when this newspaper published the full list of nominees. A sizeable list of wealthy donors to Labour had previously received honours. Of seven British donors who have given more than a £1m to Labour since it came to power, six have received honours. They include Lord Drayson, who gave £1.1m and is now a Defence minister, and Lord Sainsbury of Turville, now a Science minister, who has given Labour £16m.

Throughout the Blair administration there have been questions over New Labour's association with wealthy businessmen, including Bernie Ecclestone, the Formula One boss, who gave £1m to Labour, which was later returned after motor racing was exempted from a ban on tobacco advertising.

Mr Blair also came under fire over his party's links with Lakshmi Mittal, the steel magnate, and the Hinduja brothers. The latter were at the centre of the "cash for passports" scandal that led to the resignation of Peter Mandelson, even though he was cleared of any wrongdoing.

Seventeen of the 22 Labour donors who have given more than £100,000 since 2001 have been given honours. They include Patrick Stewart, the Star Trek actor, and Bill Kenwright the impresario.

Being a donor to a political party is not a bar to a peerage but the commission has increasingly wanted to "satisfy itself that the person would be a credible nominee irrespective of any payments made to a political party or cause".

Sir Gulam Noon, a Labour donor who made millions of pounds through his curry empire, is believed to have passed this test and been approved by the commission. But the honours watchdog has refused to approve three millionaire party donors recommended for seats in the House of Lords after the list was leaked to the IoS. They include Dr Patel, who was one of the architects of the Government's policies on the elderly. He was cleared by the General Medical Council last year after allegations that residents were neglected at a care home his company used to run.

Sir David was knighted in January 2003 for charity work and gave £200,000 to Labour the following May, as well as millions of pounds to Bexley Business Academy. He is also believed to have given party funds a £1m loan.

Mr Townsley, 59, gave generously to one of the Prime Minister's city academies as well as £6,000 to Labour and £10,000 to Frank Dobson's failed campaign to be Labour mayor of London.

The commission is believed to have examined whether loans were made and whether they were at a rate of interest below those of the high street banks.

Yesterday politicians called for Mr Blair's powers of patronage to be curbed and for his power to overrule the appointments watchdog - which can recommend against a peerage but not formally block it - to be removed. They also said it would be wrong for loans to any political party not to be considered in the vetting process.

Lord Oakeshott of Seagrove Bay, a former member of the Parliamentary Joint Committee on Lords Reform, said: "Loans can create even more of an obligation than outright donations because the person making the loan can have a hold over the party. If a peerage is not given, a person could in principle ask for his loan back. Someone who has a large loan outstanding can have more of a hold over a party than someone who has given a donation outright.

"Blair cannot be judge and jury over these peerages. He is the leader of the Labour Party but after the commission has examined the peerages Tony Blair as Prime Minister has the power to overrule their advice. That is the flaw at the heart of the system."

Dr Patel again expressed his dismay yesterday at the leak of the list and his hurt at reports that he had not been approved by the honours watchdog. He was told last year he had been nominated for an honour, but has been left in limbo while he has been investigated by the watchdog. His spokesman criticised the comments of Claire Rayner, the former agony aunt, who said it would be "morally wrong" to give a peerage to a Labour donor because he had involved in a care home scandal, even though he had been cleared of wrongdoing.

"He is deeply, bitterly hurt and saddened by what has happened since the list was first leaked. He has been named in the process [and] now these leaks are casting aspersions," the spokesman told the IoS. "He did not ask to be nominated. When he got the nomination it was a great honour at the end of a long journey from a Hackney council estate - that is where he grew up. It was a massive honour. He [has] said: 'I want justice.' Yes, he has given money to the Labour Party. He doesn't hide that fact. He has given over £5,000 on two occasions. The fact that he gave money is irrelevant. Are you going to be disqualified from public office if you have given money?"

Hugo Charlton, who nominated himself for a place in the House of Lords, also removed himself from the list, after it emerged that the Green Party, which he was set to represent in Parliament, was unaware of his self-nomination.

The Appointments Commission has also launched an inquiry into Robert Edmiston, a Tory donor and the chairman and chief executive of IM Group, who was nominated by Michael Howard. Mr Edmiston has given millions of pounds to city academies and £250,000 to the Conservative Party.

After the IoS revelations last October, the commission also looked at the DUP leader Ian Paisley's decision to nominate his wife Eileen for a peerage. However, she has been approved as an appropriate nomination.

In addition to looking at loans and donations to political parties, the committee has examined whether the donors in question are all domiciled in Britain for tax purposes.

The impasse has renewed accusations that Mr Blair is rewarding businessmen who supported some of his more controversial policies with Lords seats. The Prime Minister came under renewed pressure yesterday to heed the advice of the Appointments Commission and allow the list of peers to go ahead with the names at the centre of the dispute.

The situation, which has been going on since last autumn, has threatened the throw the entire appointments process into disarray. Some peers on the list who have been approved are privately furious their honours are being held up because of the "stubbornness of Downing Street".

One nominee, who heard last summer he had been nominated for a peerage said: "We have no idea what is going on. We are just in limbo. It would be much better if Downing Street just made up its mind and took into account the recommendation of the Appointments Commission."

Meanwhile it emerged that the chairman of the Committee on Standards in Public Life, Sir Alistair Graham, has arranged for a meeting with the Chancellor of the Exchequer, Gordon Brown, to discuss standards.

Sir Alistair has called for a tougher standards regime and has been critical of Mr Blair for failing to implement a series of recommendations to combat sleaze. He is frustrated that the Prime Minister has not created a panel of independent wise men and women who could be called upon to investigate allegations of sleaze by ministers.

Mr Blair has repeatedly resisted that he alone must decide the fate of ministers accused of breaking the rules.

A spokesman for the Labour Party did not deny that loans had been received from the people nominated for peerages but it said that they had not been at rates more generous than the bank rate.

"These are people who have been nominated as working Labour peers, whose political allegiance to the Labour Party is well known and who have publicly donated to the Labour Party," the spokesman said. "There is nothing wrong with donating or lending money to a political party as long as the rules are strictly adhered to.

"The issue here, regarding the loans that they have made, is whether the strict rules set by the Electoral Commission, regarding the declaration of loans that have been made at a commercial rate, have been fully observed. They have. It has been suggested that these loans were made at a preferential rate, That is absolutely not the case."

The £1m Club: Six super-rich benefactors

Donated £1m and received a peerage or knighthood

BARON SAINSBURY OF TURVILLE Businessman and science minister, with estimated 13 per cent shareholding in family supermarket chain. Has donated £16m to Labour; made a life peer in 1997.

SIR CHRISTOPHER ONDAATJE Athlete, businessman, author, philanthropist and adventurer. Donations to Labour of £3.6m. Elder brother of novelist Michael Ondaatje. Knighted in 2003.

SIR RONALD COHEN Egyptian-born multi-millionaire, Liberal parliamentary candidate and venture capitalist. Has given Labour donations of £1.1m. Knighted in 2001.

LORD BHATTACHARYYA Indian-born British engineer and government adviser. Donations to Labour total £1.3m. Made a CBE in 1997 and knighted in 2003. Made a life peer in 2004.

LORD DRAYSON Biotechnology entrepreneur, awarded a government smallpox vaccine contract. Now a defence minister. Donated more than £1.1m since 2001; given peerage in June 2004.

LORD HAMLYN Publisher and patron of the arts; gave£3m to Labour. Made CBE in 1993 and peer in 1998. Died in 2001.

The £10,000+ Club: A dozen honours for 12 donors

Donated £10,000-plus and received a peerage or knighthood

£21,000 LORD ALLI, Television

£22,500 LORD BRAGG, Broadcasting

£200,000 SIR DAVID GARRARD, Property

£500,000 LORD GAVRON, Printing

£16,000 BARONESS GOUDIE, Management consulting

£49,000 LORD HASKINS, Food

£300,000 SIR FRANK LOWE, Advertising

£75,000 LORD MITCHELL, Technology

£220,000 SIR GULAM NOON, Food

£139,000 LORD PAUL, Steel

£414,000 SIR SIGMUND STERNBERG, Property

£200,000 SIR ALAN SUGAR, Consumer electronics