Downing Street panics as Levy points finger at Blair

DOWNING Street was last night plunged into panic amid claims Lord Levy had pointed the finger of suspicion at Tony Blair following his arrest over the 'cash-for-peerages' inquiry.

In an emergency summit with party chairman Hazel Blears following his arrest last week, Levy insisted he would tell everything he knew about Labour's secret loans operation, even if his revelations propelled the Prime Minister further into the spotlight.

Scotland on Sunday understands Levy's police statements will make clear Blair was central to the campaign to secure multi-million-pound loans from supporters, and that he was well aware the transactions could look politically questionable.

The party hierarchy is now terrified Levy's evidence will bolster attempts to establish a crucial link between the operation to sign up 10 secret loans worth £14m for party coffers, and the decision to nominate four of the lenders as Labour peers.

Levy's response last night ratcheted up the pressure on Blair as he faced attacks from all sides over his role in the affair.

But Labour maintained there was still no suggestion that the Prime Minister or any other party figure was involved in criminality, specifically the award of honours, in return for cash.

"There is a high degree of panic," one senior Labour insider conceded of the reaction to Levy's conversation with Blears, the day after his second visit to Colindale police station in north London. "Michael cannot be expected to do anything but tell the truth.

"We understand he went through the process by which the loans were decided upon, who arranged them and what the motivation was. There was some unease about taking loans instead of donations and I understand he covered that.

"The very strong feeling in the party is that no one has done anything wrong, but the thought of him giving every cough and spit is unsettling."

Reports of Levy's response to police questioning come four months after a Blair confidant insisted the Prime Minister had known all about the loans operation but authorised it in an attempt to save the party from bankruptcy. Blair is expected to be interviewed by Metropolitan Police within the next month.

The police investigation exploded into life with Levy's arrest on Wednesday, and the subsequent revelation that 48 people, including at least two ministers, had been interviewed during inquiries so far.

The net closed tighter around Blair last night when it emerged that the former head of Labour's "High Value Donors Unit", dedicated to attracting wealthy supporters to the party, had also been questioned.

Nick Bowes sparked alarm at Labour headquarters when he said: "The whole peerages thing is corrupt. It is still one of the biggest forms of patronage in the hands of the PM."

The Prime Minister is expected to launch a counter-offensive against his critics when he gives a live interview to the BBC's Politics Programme, live from the G8 summit in St Petersburg later today.

In another interview due to be broadcast today, former deputy Labour leader Roy Hattersley will urge the Prime Minister to resign in September.