'Toxic' cash for peerages row threatens to engulf Blair

Magnate who made loan is kicked off peers' list <br/>PM accused of concealing 'toxic' financial links<br/>Labour academic calls for naming of lenders

Tony Blair was plunged into a damaging new row over the cash-for-peerages scandal yesterday when an Indian food magnate was blocked from joining the House of Lords after disclosures that he had made a secret loan to the Labour Party.

Mr Blair's nomination of Sir Gulam Noon has been rejected by an independent watchdog, reversing its initial approval, The Independent on Sunday can today reveal.

The blocking of a fourth Labour donor prompted one member of Labour's ruling body to condemn as "toxic" the growing sleaze threatening to engulf the Prime Minister. Mr Blair admitted last week to keeping the party's treasurer and other senior figures and ministerial colleagues in the dark about almost £14m in loans raised before the general election.

It emerged last night that Mr Blair's head of government relations played a key role in arranging a certificate putting forward a nominee for a peerage which allegedly stated misleadingly they did not have a financial relationship with the party. Ruth Turner helped draw it up inside No 10, according to The Sunday Telegraph.

Mr Blair's difficulties over a list of proposed working Labour peers intensified when the House of Lords Appointments Commission privately recommended that Sir Gulam's name be withdrawn, expressing concerns about his nomination.

Downing Street received a hand-delivered letter containing the watchdog's reservations last week. The Appointments Commission acted after learning that Sir Gulam, worth around £50m, had made a £250,000 loan to Labour and a £200,000 donation. A senior government figure admitted the watchdog was "furious" it had not been told about the loan.

Lord Oakeshott of Seagrove Bay, a Liberal Democrat, asked: "How many more amazing coincidences do we need before Tony Blair confesses the connection between loans, donations and peerages?" Barry Townsley, Sir David Garrard and Dr Chai Patel have previously been rejected.

Dr Patel indicated yesterday that he was not willing to withdraw, issuing a statement calling for "fairness" in his treatment after the leak of his name. The watchdog has written to him to apologise for the " considerable distress" caused by the "stories appearing in the media". A £1.5m loan made by Dr Patel falls due in August. Labour has debts of around £23m and faces crisis as loans come up for repayment.

Ann Black, one of the Labour figures preparing to confront Mr Blair at a National Executive Committee meeting on Tuesday, said the cash-for-peerages row had become a "toxic" issue. Mr Blair will face demands at the meeting to disclose whether the party accepted loans to circumvent a ban on foreign donations.

Robert Edmiston, a businessman nominated for a place on the Conservative benches, has also been blocked by the honours watchdog. He has in the past lent money to the Tory party as well as donating £250,000.

The identity of other Labour donors who gave pre-election donations is still shrouded in mystery, although Lord Sainsbury, the Science minister, is understood to have lent some of the £14m raised.

The head of the Electoral Commission called on all parties to reveal previous loans while the Committee for Standards in Public Life plans to extend an inquiry into party funding. Sir Gulam was unavailable for comment but his office said he would abide by the watchdog's ruling.

Lord Kumar Bhattacharayya, a Labour donor, said the names of all Labour's lenders should be published.