BBC News,  24 March 2006

Twelve backers lent almost £14m before the last general election.

Four had their names put forward for peerages, leading to accusations of "cash for honours", which Downing Street has strenuously denied.

A Labour spokesman said the letters, sent after the loans were agreed, had been to "set out the legal terms".

'Fair and legal'

Loans were made with interest rates of between 1% and 3% above the base rate.

The Labour spokesman said: "These letters were sent out once the loans had been agreed upon.

"The purpose of sending the letters was to set out the legal terms upon which the Labour Party received the loans so as to ensure it was done in a fair and legal way, strictly within all legal guidelines."

Meanwhile, on Thursday, Constitutional Affairs Minister Harriet Harman pulled out as panellist on BBC's Question Time programme.

Host David Dimbleby said she had "mysteriously withdrawn at the last minute".

Ms Harman was likely to be quizzed about the loans, which her husband, Labour Party treasurer Jack Dromey, has said he was "kept in the dark" about.

A week ago Ms Harman gave up parts of her role which involve overseeing election laws and House of Lords reform.

Referring to her absence, Mr Dimbleby said: "The fact that she is the wife of Jack Dromey, Labour Party treasurer, who blew open the loans affair, has nothing whatsoever to do with her absence."

Her seat was filled at short notice by ex-Labour MP Tony Benn.

A government spokesman later told the BBC News Website: "It's a matter for the Labour Party."

A Labour spokesman said the matter was one for Ms Harman's office and Question Time.

'Shows guilt'

Conservative Question Time panellist Boris Johnson, shadow higher education minister, told the programme he believed Ms Harman "was pulled".

"We are asked to accept that it is pure accident that she is not here to speak, to fight the corner. I think it shows guilt," he said.

"I do not want to do Hattie (Harriet Harman) down... I think she was pulled by a 'force majeure' from Number 10."

Mr Benn said the whole affair had been "a disgrace", adding: "I hope the Labour Party gains control not just of its finances, but also its policy."

Following the disclosure of the loans, Mr Blair announced changes in the honours system to withdraw as prime minister from the process of nominating people for honours. This did not affect his ability to create peers.

On Thursday, Rod Aldridge, the chairman of outsourcing firm Capita, said he was to step down over "spurious" claims his £1m loan to Labour had resulted in the group getting government contracts.

An inquiry into party funding has been launched by the influential constitutional affairs committee, who will also interview Tony Blair's chief fundraiser Lord Levy.

He will also face questioning from the public administration committee.

The Electoral Commission has written to the treasurers of all the main parties asking them to declare all loans which "are not on commercial terms".

This would include those which "may be converted into a donation at a later stage".

The treasurers have until 29 March to respond.